China Consumerism Makes Momo Inc (ADR) Stock a Buy on This Current Dip

MOMO stock - China Consumerism Makes Momo Inc (ADR) Stock a Buy on This Current Dip

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If you’ve read my posts on InvestorPlace, you know that I’m a fan of the whole China urbanization story. In short, China has a ton of people, and they are starting to act a lot like American consumers. That means more smartphones, more social media, more shopping, more traveling… essentially, more everything.

That story has played out very well for a bunch of Chinese internet stocks. The retail giants, Alibaba Group Holding Ltd (NYSE:BABA) and JD.Com Inc(ADR) (NASDAQ:JD), are up 27% and 12%, respectively, in the last six months. The social media giants, Tencent Holdings Ltd (OTCMKTS:TCEHY) and Weibo Corp (ADR) (NASDAQ:WB), both added about 50% in the same period. Meanwhile, search giant Baidu Inc (ADR) (NASDAQ:BIDU) gained 35%.

By most appearances, the China urbanization story is a rising tide that is lifting all boats.

Well, almost all boats. One China internet stock that was not invited to the party is Momo Inc (ADR) (NASDAQ:MOMO). But I think the recent weakness in MOMO stock is a buying opportunity. Here’s why.

MOMO Growth Looks Good, Despite Some Concerns

There are several reasons why MOMO stock might be a buy on this dip.

Firstly, MOMO is often dubbed as China’s version of Tinder, and that is somewhat ironic. Thanks to growth in paid services (see Tinder Gold), that app has powered a meteoric rise in Match Group Inc (NASDAQ:MTCH) stock over the last half year (up more than 80%). Clearly, demand for paid match-making services is on the rise in the U.S.

If the China social media landscape is indeed starting to look like the U.S. landscape, then we should see a similar rise in demand for paid match-making services there soon. That will benefit MOMO stock.

Still, MOMO is much more than just China’s Tinder.

Which leads me to my second reason MOMO stock is a buy: The company is a leader in China’s booming live-streaming market. To be sure, growth in this market is decelerating and the Chinese government is starting to step in and crack down, but live-streaming there is still a secular growth market.

Mobile phone penetration and usage is only going up from here, and with it goes mobile video consumption and live-streaming. As Elijah Whaley, CMO of ParkLu, which manages Chinese live-streaming stars, observed: “Mass programming cannot satisfy niche interests.”

So, live-streaming will continue to grow, driven by both want and necessity. That growth should boost the value of MOMO stock.

Cheap Valuation

And my third reason? Simply put, MOMO is still a growth stock. Yes, revenue has slowed dramatically over the past several quarters, from more than 400% in the first quarter of this year to 53% expected growth in the fourth quarter, driven by a slow-down in the scorching hot live video service segment. But given the company’s exposure to China’s burgeoning smartphone market, MOMO will continue to post revenue increases north of 20% a year into the foreseeable future.


And while gross margins are eroding, that revenue growth should drive healthy operating expense leverage. It’s a combination that should lead to stable net margins. Therefore, MOMO should be able to grow earnings by at least 20% per year over the next several years (the Street is modeling for more than 25% earnings growth next year).

The S&P 500 Index is expected to grow earnings by 10.5% over the next several years. By definition, then, MOMO stock is a growth stock.

Finally, MOMO stock is dirt cheap. Despite being a growth stock, MOMO trades at just 15.2x this year’s earnings estimate. Assuming earnings can grow at 20% per year over the next several years (likely a conservative estimate), MOMO is trading at an abusrd 24% discount to its growth prospects.

The S&P 500, by comparison, is trading at a 95% premium to its growth prospects (20.5x this year’s earnings for 10.5% growth). From this standpoint, assuming MOMO’s growth narrative doesn’t come completely unhinged, MOMO stock should appreciate significantly in a long-term window.

Bottom Line on MOMO Stock

The stock has been beaten up recently.

I’m not exactly sure when sentiment will swing on this name — it’s in a clear downtrend — but MOMO is now too cheap to ignore. So long as this company continues to grow with the burgeoning Chinese internet economy (which it should), then MOMO stock should head significantly higher over the next several years.

As of this writing, Luke Lango was long MOMO, BABA, JD, WB, and BIDU.

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