Why Momo Inc (ADR) Stock Is a Solid Buy Right Now

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Momo stock - Why Momo Inc (ADR) Stock Is a Solid Buy Right Now

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Have you heard of Momo Inc (ADR) (NASDAQ:MOMO) before? Chances are that you have if you’re reading this article. But a lot of people aren’t quite sure what Momo Inc does, given that it’s a Chinese social media/messaging company. I first stumbled onto Momo stock when it gapped higher in March 2017 and nearly doubled 10 weeks later. Fast-forward to year-end, shares put in a bottom in December and have been climbing ever since.

Is now the time to buy Momo stock? Let’s take a closer look.

Built originally as a messaging company, MOMO has expanded to premium memberships, third-party game-sharing revenue and producing marketing tools for local merchants. All of these features are helping fuel the company’s impressive growth.

Many social media companies may boast impressive revenue growth, but fail to turn positive free-cash flow or show profits. If they do, most come with a lofty valuation. Square Inc (NYSE:SQ) comes to mind. So too does Box Inc (NYSE:BOX).

In the case of Momo Inc though, those scenarios aren’t the case. Instead, the company continues to have strong growth in both sales and net income, while Momo stock’s valuation is quite reasonable.

A Deeper Look at Momo’s Numbers

On Mar. 7, Momo will report its fiscal fourth-quarter results. For the full year, analysts are looking for earnings of $1.71 on revenue of $1.31 billion. If Momo meets or exceeds current expectations — which it has done for four straight quarters — it will represent more than 100% growth for both metrics. Talk about impressive!

Current estimates call for another strong year in 2018. Earnings expectations stand at $2.13-per-share, up almost 25% from 2017 estimates. Revenue expectations call for 30% growth in 2018.

When looking at these numbers, you might realize just how reasonably priced Momo stock is. Shares trade at 19.5 times 2017 earnings and just 15.7 times 2018 estimates. That looks downright cheap when you consider how much Momo stock is growing earnings next year after an intense year of growth in 2017. While its growth is set to slow considerably, the valuation is low enough that it seems to reflect that slowdown.

It’s not just a growth story, as the fundamentals are really solid. Momo sports operating profit margin of more than 29%, while the net profit margin is almost 26%. It has trailing free-cash flow (FCF) of $393 million and that doesn’t include fourth-quarter results. For reference, this FCF figure has a very consistent and steady trajectory from the lower left to the upper right. Like Momo’s revenue and earnings, its growth is no joke either. Two years ago, trailing FCF stood at less than $50 million.

In a nutshell, we have robust earnings, revenue and cash flow growth and a below-market valuation. Why? My guess would be that not many people are familiar with the Chinese company and thus, it trades at a discount.

Trading MOMO Stock

After a sharp move higher earlier this month, Momo stock is backing off. Shares have fallen from a recent high of nearly $36 to a low near $33. However, $32-$33 could prove to be support. This volatile name can be hard to trust though when it comes to price action. Just look at the chart below.

Trading MOMO Stock
Source: Chart courtesy of StockCharts.com

So what should investors do? If I were bullish on Momo stock and looking to buy, I would consider pulling the trigger between $32 and $33 for a starter position. Should this level fail to hold, it will give me a chance to lower my cost basis by adding to the position at a lower price. Specifically, I would add to the position if Momo stock fell to its trendline support (blue line).

Below that and, as a trade, investors may want to consider cutting their losses. It’s worth pointing out that analysts currently have an average price target of ~$39 on Momo. That target implies about 17.5% upside from current levels.

Keep in mind though, the company reports on Mar. 7.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell has a long position in BOX. 

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/momo-inc-adr-stock-solid-buy/.

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