A couple of my Investor Place colleagues have made compelling cases for buying Momo Inc (ADR) (OTC:MOMO) in recent days. And I agree with almost everything they said. But I must admit, I was still skeptical about Momo stock. Until last Friday.
Last Friday, MOMO poked its head about its 50-day moving average, which has been a rare sight of late. It crossed that technical barrier in the previous week, albeit briefly. And it spent about a week above its 50-day moving average just before Thanksgiving. Prior to that, MOMO stock hadn’t been above that line since August.
The 50-day moving average isn’t the end-all, be-all, of course. After all, the last two times MOMO pushed above it, the stock promptly tumbled. So why should this time be any different? There are three reasons.
MOMO Is at a Two-Month High
MOMO’s false starts this month had been capped at $27. On Friday, the stock pushed above $28 for the first time since November. Up 26% since the start of December, this is now the biggest sustained rally in MOMO stock since last summer. That’s an encouraging trend.
Chinese Stocks Have Gotten Going
The big drop-off in Chinese stocks in the second half of November undoubtedly had a negative impact on MOMO, which lost nearly one-third of its value in less than two weeks. Now, Chinese stocks are red-hot again, with the Shanghai Stock Market adding 200 points in the last month.
The last time the Chinese market had this much momentum, back in the summer, MOMO jumped to all-time highs above $45.
When MOMO hit $45 in August, it had a price-to-earnings ratio of 34. Even back up at $28 as of this writing, Momo Inc now trades at just 18 times earnings—a steep discount to fellow Chinese internet stocks Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), and Weibo (NASDAQ:WB).
With earnings expected to grow 25% this year, MOMO is grossly undervalued.
Having shaken out most of the weak hands during its 30% plunge, buyers are returning to MOMO, snatching it up while it’s still cheap. You’d be wise to do the same—it won’t stay a bargain for long.
Bottom Line on MOMO Stock
Known as the “Tinder of China,” Momo is the perfect company to take advantage of the boom in social media and mobile usage in the world’s most populous country.
Despite its end-of-year mudslide, Momo Inc still beat the market (both Chinese and U.S.) by a comfortable margin in 2017, posting a 33% gain.
That said, those gains were modest compared to many of its fellow Chinese internet stocks. Because it isn’t a household name in America like Alibaba, and doesn’t quite have the same kind of social media clout as Weibo, Momo kind of gets forgotten on Wall Street.
Now, with momentum on its side, tailwinds from the Chinese market at its back, and—perhaps most importantly—a much cheaper valuation than most of its Chinese internet brethren, Momo stock is about to play catchup in a big way.
Buy it now—before institutional investors start gobbling it up and driving up the price.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.