Here’s the thing about Momo Inc (ADR) (NASDAQ:MOMO): it’s just like all those red-hot Chinese internet stocks, but MOMO stock is much, much cheaper.
Everyone is raving about the China internet and retail growth narratives. It seems the majority of China is urbanizing and digitizing. That means more smartphones, more social media, more shopping, more traveling, essentially, more everything.
This Chinese consumer demand ramp has created an investor demand ramp for names like Alibaba Group Holding Ltd (NYSE:BABA) and JD.Com Inc(ADR) (NASDAQ:JD), the retail giants of China, as well as Tencent Holdings Ltd (OTCMKTS:TCEHY), and Weibo Corp (ADR) (NASDAQ:WB), China’s tech darlings.
Alibaba stock has soared 90% over the past year. JD stock is up 70%. Tencent stock is up 120%. Weibo stock is up a sizzling 170%.
As these stocks have exploded, so have their valuations. That is only natural. With big growth comes a big valuation.
But that isn’t the case with MOMO stock. Momo, often labeled the Tinder of China, has just as much growth as its Chinese internet peers, but its valuation is massively discounted.
Why? No good reason. So buy Momo before everyone else does.
Big Growth, Big Discount
Momo is a really good company doing innovative things in a really good space.
Momo’s business most closely resembles Tinder, as the platform is designed to be a couples and friends match-making service. This is a good space to be in. It runs parallel to the whole social media growth narrative playing out in China, but also evades competition because its niche and designed for a purpose unmet by other Chinese social platforms.
This niche, targeted purpose is why Tinder has powered a huge rally in the stock price of its parent company, Match Group Inc (NASDAQ:MTCH). As the China social media landscape starts to look more and more like the U.S. landscape, Momo should rally in similar fashion.
But Momo is much more than just China’s Tinder. 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. That is partly why Momo has struggled as of late (down 30% over the past 6 months).
But 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.”
Overall, the growth narrative at Momo is not broken. It still runs parallel to the whole China consumerism narrative, which is only booming, and that puts Momo in the same league as Alibaba, JD, Weibo, and Tencent.
The numbers show this. Last quarter, revenues more than doubled year-over-year. Net income jumped nearly 90% higher. The user base grew by 22%.
Yet despite this big growth in a hyper-growth market with a long runway, MOMO stock trades at just 16-times this year’s consensus earnings estimate. That is by far and away the lowest multiple in the whole China internet group. It’s also paltry against the backdrop of next year’s 25% earnings growth estimate.
That low of a multiple for this big of a growth stock makes no sense. Yes, growth is decelerating, and yes, China government intervention is a big risk to part of the company’s growth narrative. But growth is still big (20%-plus earnings growth is here to stay for several years).
And the government won’t completely shut down Momo’s business because the company is a key element of the country’s economic and technology growth narratives.
Put those risks aside, and there is no reason MOMO stock should trade at this discounted of a valuation. When all is said and done, MOMO stock will head significantly higher.
Bottom Line on MOMO Stock
It’s the cheapest way to play the China internet growth narrative. If you’re looking for exposure to China’s internet boom but don’t want to pay a steep price, go ahead and buy MOMO stock.
As of this writing, Luke Lango was long MOMO, BABA, JD, and WB.