Momo Inc (ADR) (NASDAQ:MOMO) was one of the year’s hottest Chinese stocks. However, it’s recently diverged from its peers. MOMO stock has lost its mojo; in fact, it’s down almost 50% since its summer highs.
And at first glance, the market’s reaction seems totally irrational. The company keeps smashing its earnings numbers out of the park. It’s not hard to see why some investors are now excitedly buying the dip on MOMO stock. But there’s a few other factors to take into consideration. The bull case for MOMO is strong, but there are cons as well.
MOMO Stock Cons
Market Doesn’t Trust Momo’s Business Pivot: Momo got going in China primarily as a dating app. It had a good deal of success with that specialized service. Since then, management has aspired to be more than just the Tinder of China.
Momo has branched into various other, more mainstream applications. These include a big push into video streaming of live events such as concerts. Given the relative lack of transparency of Chinese companies, American investors tend to be skeptical when a business dramatically changes its strategy.
Management Shift: Interestingly, three of Momo’s nine board members quit the company after the latest earnings report. That was fully a third of Momo’s board, leaving it with just six members. Momo appointed their COO to the board, getting it back to seven members.
That’s still pretty sparse for what, by all accounts, looks like a growing, prosperous company. You never know the motivations of insiders, but it does raise eyebrows to say the least. It adds to the MOMO stock bears’ argument that the company’s business transition isn’t working. While the company’s app continues to garner more users, paid user growth flatlined last quarter. Perhaps the departing board members knew that another shoe would be falling in future quarters.
Guidance Came Up Short: Twice this year Momo has topped earnings estimates, yet saw its stock price crater. This is because Momo keeps guiding under analyst expectations.
For this most recent quarter, for example, Momo guided below what the Street was hoping for. It subsequently delivered results above the top end of its guidance range. So MOMO stock owners shouldn’t panic that the company lowered expectations for Q4. Still, it isn’t what the market was expecting or hoping for, especially with the transition in business strategy and board turmoil.
MOMO Stock Pros
Strong Earnings Story: Say what you will about the recent decline in the price of MOMO stock, the company continues to deliver strong earnings. Momo’s recently reported quarter marked the sixth in a row that the company comfortably topped estimates.
As mentioned above, Momo stock hasn’t benefited from these most recent strong quarters due to providing subsequent weak guidance. But that may be missing the point. Net income almost doubled this quarter versus the same period last year. Revenues showed equally powerful gains. Live video streaming revenues in particular almost tripled, offering a powerful defense of Momo’s adjusted business strategy.
More Focused Marketing: Momo went full steam ahead advertising the switch from just dating to a more complete entertainment focus. The company blanketed public spaces such as buses and elevators with ads making people aware of the switch.
However, this marketing spend appears to have been largely misguided. The company’s costs grew even faster than revenues, causing profit margins to sink. Now, though, Momo will be working on more targeted advertising methods to acquired new customers. Management still needs to prove it can find new clients profitably. However, it’s certainly a positive that they are focused on reining in reckless and overeager ad spending.
Cheap Tech Stock: MOMO stock is, remarkably enough, selling for just 15 times earnings. It’s not hard to understand why it may not get the same valuation as other leading internet properties. It is in China. People may view it as a one-app wonder. And there are numerous short-term problems, such as the management shake-up, business transition and ineffective ad spending.
All that said, you aren’t going to find many companies growing income at nearly 100%/year selling at 15x earnings in today’s market. With MOMO stock washing out from $45 to under $25, this high-growth name is on a serious discount.
Verdict on MOMO Stock
There are a lot of moving parts with MOMO stock at the moment. Last year, it appeared Alibaba Group Holding Ltd. (NYSE:BABA) intended to take Momo over. However, those plans fell apart, and Alibaba dumped a ton of MOMO stock on the market.
From that low point, MOMO stock has tripled, as the company moved from just being a dating app to a leading streaming and entertainment site. However, signs of trouble are on the horizon. Board members are bailing and paid user growth has stopped.
The result? MOMO is a classic show-me stock now. If management keeps beating guidance handily, this stock will be back to $45 in no time. At just 15x earnings, and with that growth rate, shares are set for a big move.
But if management misses expectations, look out below.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
