Yalla has shown promise as the UAE’s first tech unicorn. Then came the short sellers | Salaam Gateway

Posted on October 31, 2021 via Bloomberg Technology & Innovation – It was hailed as the UAE’s first tech unicorn when it debuted on the New York Stock Exchange and touted as the “Clubhouse of the Middle East”.

But these days, Yalla Group Ltd., a Dubai-based voice chat startup, could earn a less flattering label: the stock market crash.

After quintupling in the months following its IPO last year, Yalla – a China-backed, United Arab Emirates-based social network that means ‘let’s go’ in Arabic – gave up all of its earnings, even some. Since peaking at over $ 40 in February, Yalla has lost over 80% of its market value. Its U.S. certificates of deposit, which started at $ 7.50, are now consistently below $ 7 and hit an all-time low of $ 6.26 last week.

This is a real tumble for a company once celebrated by the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, made comparisons with the young Silicon Valley Clubhouse company and even got a small stake from the fund. speculative of billionaire Steve Cohen. But as the once scorching live audio chat space cools, the company’s dramatic growth has come under intense scrutiny.

Circling shorts

In recent months, short sellers Swan Street and Gotham City Research have targeted Yalla, questioning the number of users of the social media app. Following Yalla’s quarterly results in August, which dropped the stock by 19% the next day, a lawsuit was filed alleging that Yalla and general manager Tao Yang made “false and misleading statements.”

“We warn that investors should beware of the risks of Yalla,” said Nirgunan Tirruchelvam, Singapore-based head of consumer equity research at Tellimer. Although Tirruchelvam does not have a formal recommendation on the title, he wrote in a September 16 memo that the allegations show “the risk of relying on non-financial measures.”

“This does not mean that all the claims of the short sellers are correct,” he said in an email to Bloomberg News. “But that means there are a lot of uncertainties.”

Yalla spokesman Kerry Gao refuted the claims of the short sellers, saying in a statement in May that their reports “contain many errors and distorted, misleading and unfounded claims.” In response to follow-up questions from Bloomberg News, she reiterated the company’s position. Gao also said that a recent shareholder class action lawsuit “largely repeats the false allegations” of the short sellers.

“We believe the complaint is unfounded and unfounded,” Gao said.

The buzz is fading

When Yalla made her Big Board debut in September 2020, things could hardly have been more different. The major shareholders of the company are Chinese, including directors and officers, with a complex ownership structure using multiple offshore entities, but operations are located in the United Arab Emirates.

Driven by a billion dollar valuation and enthusiasm for voice chat, which would soon be embodied by the Clubhouse frenzy, Yalla’s ADRs more than doubled in December. Two months later, they doubled again, taking them to a high of $ 41.35 on February 11 and pushing Yalla’s market value to nearly $ 6 billion.

Then Yalla’s stock market fortunes started to turn. The initial buzz wore off and the competition in audio chats began to escalate as companies like Twitter entered the arena. China’s crackdown on its US-listed companies hasn’t helped either. In May, Yalla was already down about 50% from its peak when Swan Street and Gotham City revealed they were bypassing Yalla.

According to its website, Swan Street, founded this year by an anonymous former Wall Street analyst, said in its 31-page report that Yalla’s figures did not match its own “channel checks” and that the measures of usage such as its number of average users have been inflated by bots. On its Twitter feed, Gotham City compared Yalla to Luckin Coffee Inc., the Chinese company which went public with great fanfare but filed for bankruptcy in the United States after saying more than a quarter of business had may -being tampered with. Gotham City is still running Yalla, wrote founder Daniel Yu in an email.

(Swan Street declined multiple requests for comment on the case.)

Yalla responded by saying that he “has not placed any bots in any of his discussion forums or otherwise manipulated his MAU or other operational or financial data” and announced a buyout of ‘shares of $ 150 million – a little more than the amount it raised when it went public.

Debating the numbers

In releasing its results in August, Yalla said its monthly average users (MAU) hit a record 22.1 million at the end of the second quarter. While revenue more than doubled to $ 66.6 million from a year ago, the figure was on the lower end of Yalla’s own forecast, deepening its ADR sale.

An analysis for Bloomberg by mobile app researcher Apptopia showed that all Yalla apps combined had 5.41 million average monthly users at the end of June, about a quarter of the figure the company reported. Apptopia collects data to evaluate the performance of applications and Google, Microsoft, Facebook and Andreessen Horowitz accounts among its customers.

And despite the reported increase in the number of users, there has been no corresponding increase in Internet searches for the terms “Yalla chat” (both English and Arabic) and “Yalla app”, based on Google Trends search metrics.

Yalla’s numbers “reflect something like the phenomenal growth that Clubhouse enjoyed in its first year of beta testing,” said David Tuffley, senior lecturer in applied ethics and cybersecurity at Griffith University in Queensland, in Australia. “I am skeptical.”

Four days after the release of Yalla’s second quarter results, Jeffrey Crass, a retail investor represented by Scott + Scott Attorneys at Law, a law firm specializing in shareholder fraud prosecutions, sued Yalla and its CEO , claiming they misled investors about its financial metrics and failed to disclose that the company overestimated its usage stats and revenue. Seven other investors have filed motions to serve as lead plaintiffs for the share and represent a class of shareholders in a similar situation who suffered losses from Yalla’s ADRs.

Gao said Apptopia’s estimates are “inconsistent with the financial and operational data we have collected from our own business operations and audited by our auditor.” She added that Google search trends do not accurately reflect the growth and popularity of the business. Yalla’s interactive community culture has created a strong word of mouth effect, and its growth has benefited from the rise of online social media during the pandemic, as well as Facebook advertising, Gao said. She also reiterated that the lawsuit is without merit.

Questions from users

Either way, some investors have already decided to throw in the towel. Point72 Asset Management of Cohen, one of the main external holders at the start of the year, sold its position of ADR 520,000, according to a regulatory filing dated June 30. The firm declined to comment.

ADRs closed below their IPO price for 20 consecutive sessions. Since Yalla’s peak in February, the crisis has wiped out around $ 5 billion in value and pushed its market cap below $ 930 million.

On October 17, Morgan Stanley analysts led by Omar Sheikh lowered his price target for the company’s ADRs to $ 7 from $ 16. In a research note, he wrote that Morgan Stanley AlphaWise’s survey of social media users in one of Yalla’s largest markets, Saudi Arabia, suggests “low app awareness and low usage. of Yalla, which reduces our confidence in the company’s ability to achieve high levels of long-term penetration.

A recent visit to the app showed users chatting in real time in various audio rooms, although it’s unclear who they are or, as the short sellers suggested, if there are any. real people behind all of these accounts. Bloomberg reached out to a number of people on Yalla’s Facebook page for their popular online board game called Ludo, which is similar to Parcheesi, and they said they mainly use Yalla’s app to chat while playing. to games like dominoes or Ludo.

Gao said Yalla is working with a number of social media influencers to promote his platform, including TV broadcasters Lutfi Al Zoabi and Fadia Al-Taweel. Zoabi said he is doing a daily sports segment that airs on Yalla’s platform. His wife, Sally Assad, used to work at Yalla but is no longer employed there, according to her LinkedIn profile. Al-Taweel did not respond to requests for comment.

However, it has not been easy to independently find prominent people who use or know Yalla’s services. Bloomberg News has spoken to more than 15 UAE tech entrepreneurs, specialists and influencers over the past few months, none of whom use the Yalla apps or know someone who does. Many had never even heard of it.

One of them was Lana Al Beik, a 26-year-old model who is a popular social media influencer living in Dubai, Yalla’s home base. She has 56,600 followers on Instagram and used the Clubhouse voice chat app in her early days. While pursuing a master’s degree in communications, Al Beik said she did a lot of research on local startups as part of her studies. Yalla never came.

“We talked to people about big players like Google,” she said. “We were talking about such companies all the time. But I never heard of Yalla.

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