Why Momo Inc Stock Is a Buy, But Not Right Now

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To say something has gone terribly wrong for Momo Inc (ADR) (NASDAQ:MOMO) would still be a considerable understatement. MOMO stock is down nearly 50% from its August peak, and it continues to knock on the door of lower lows. A couple of solid but uninspiring — relative to the market’s unspoken expectations — quarterly reports simply pulled the rug out from underneath the stock.

Why Momo Inc Stock Is a Buy, But Not Right Now

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Savvy investors will at least entertain the possibility that this sharp pullback is a buying opportunity. And, this reporter will even go as far as to say MOMO stock does indeed deserve a spot on your watchlist now.

Just for the record though, this reporter doesn’t recommend you try to catch this falling knife.

The Psychology Behind MOMO Stock

Ask ten people what Momo is, and there’s a good chance half of them will have no idea, and the other half will struggle to come up with a comparison. Generally speaking though, it’s a Chinese social networking platform akin to Twitter Inc (NYSE:TWTR) or Facebook Inc (NASDAQ:FB), but with location-based and video-sharing features built in. It started out as a dating app (more or less), but it has since morphed into an entertainment venue.

More important to would-be investors, whatever Momo is, advertisers like the crowd it draws. Sales more than tripled last year, and are likely to almost triple again this year. Better still, Momo is convincingly profitable, and increasingly so. Last year’s earnings of 87-cents-per-share are projected to reach $1.69-per-share of Momo stock this year, and grow to $2.21-per-share next year.

It is, to put it bluntly, yet another Chinese internet success story. Tapping into such growth isn’t without its dangers, however.

With many investors missing out on the “gangbusters” gains dished out by the likes of Alibaba Group Holding Ltd (NYSE:BABA) or Weibo Corp (ADR) (NASDAQ:WB), traders who may have missed out on those initial opportunities are a little too keen to not miss the next one, which is Momo, and which explains the 150% rally between the end of last year and August of this year.

As is all too often the case, though, the market was building a massive rally on unreasonable and unfair expectations. Realizing their wild exuberance four months ago, investors fell out of love just as violently as they fell in love with MOMO stock a year ago.

The company’s underlying growth story hasn’t changed though … at least not in a way that anyone shouldn’t have expected. Last week, the organization reported a 126% increase in quarterly revenue, and an 87% year-over-year improvement in earnings.

The prod for the pullback in the meantime? A fourth-quarter sales outlook that’s “only” 50% better (at the low end of the range) than the year-ago comparison. It’s a growth pace that’s still decidedly enviable by nearly any other company. The slowing growth rate is entirely a function of its size. The bigger it gets, the smaller the relative growth gets the next comparable quarter. Sales and profits are still making tremendous forward progress.

That’s the polite way of saying investors acted without thinking, on the way up and on the way down. This is still a great story from a compelling company.

Bottom Line for MOMO Stock

That doesn’t mean traders get paid anything extra for being a martyr, however, nor does it mean you should step into this name on principle. If the stock is falling, the stock is falling.

On the flipside, how long will a stock still posting double-digit growth (high double digits, to be clear) that’s priced at a trailing price-to-earnings ratio of 18.8 and a forward-looking P/E of 10.8 remain in the gutter? Probably not long.

To that end, this isn’t a case of whether you should buy into Momo. You should buy into Momo. It’s a case of when you should step into a new MOMO stock position. Many good investors have cut themselves trying to catch falling knives.

The answer to the question isn’t entirely clear, though veteran traders would be wise to keep an eye out for the familiar signs of capitulation. And, if there’s no clear sign of a single-day capitulation, keep your eyes peeled for a slow, smoldering reversal that generally starts with a lot of congestion and consolidation on the chart.

Whatever it ends up looking like though, now the fundamental underpinnings for a rebound have been and continue to be in place.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/why-momo-inc-stock-is-a-buy-but-not-right-now/.

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