China dating app turned live-streaming platform Momo Inc (ADR) (NASDAQ:MOMO) had a really good start to 2017. But the back half of the year wasn’t as pretty.
As soon as Chinese regulators started cracking down on live streaming — calling it harmful to social morality — investors freaked out that Momo’s massive growth could disappear at any second. MOMO stock subsequently dropped from above $40 in mid-2017 to nearly $20 by late November 2017.
But my take on the whole situation is that such Chinese regulation concerns are overblown. Yes, China is cracking down on live streaming, but it isn’t stopping the entire industry. Instead, it’s censoring content, making sure that what is being streamed isn’t inappropriate.
Back in June, China’s Ministry of Culture didn’t put a halt on all live-streaming platforms. They simply shut down 12 apps for showing pornographic content.
In other words, so long as MOMO plays by the rules, the app should continue to grow in popularity. Moreover, the company is the biggest and arguably most popular player in this space, so Chinese regulators will likely favor working with it as opposed to working against an app which has gained such huge scale and popularity.
Investors appear to be catching on that Chinese regulation concerns were overblown. MOMO stock is up 40% since early December.
This rally will continue, and its next big leg up will be a result of blowout earnings.
Why Earnings Could Be a Huge Catalyst
Earnings are still about a month away, but I don’t see any reason why the numbers won’t be really good. And if the numbers are really good, MOMO stock could explode higher.
This is a big growth story supported by a secular boom in China internet usage. That China internet growth narrative hasn’t slowed at all recently, so neither should MOMO’s growth.
Just look at recent data from research firm Jiguang Data. Jiguang Data shows that mobile usage in China continued to skyrocket in 2017.
The average mobile internet user had 40 apps installed on their phone by the end of 2017, up from 31 at the beginning of the year. The amount of time mobile users spent engaging with those apps boomed to 4.2 hours per day. Roughly 30 minutes of those 4.2 hours was dedicated to watching videos (and MOMO is a live-streaming video platform).
Most importantly, MOMO was listed as the favorite app for men in China.
With MOMO still being one of the favorite apps in a booming mobile China marketplace, there is no doubt in my mind that the numbers for this company will be good now and into the foreseeable future. Moreover, the company has consistently beaten analyst estimates over the past several quarters. That won’t change so long as the surrounding growth narrative remains red-hot.
But MOMO stock hasn’t always risen after strong quarterly reports. The last two quarters, the stock has gotten killed after quarterly results.
But this time around things are a lot different.
First off, there is the fact that the stock is trading at a really depressed valuation.
Two quarters ago, MOMO was trading at 26 times forward earnings heading into the report. Last quarter, it was trading at 19 times forward earnings ahead of the report. Both times, MOMO stock plummeted after strong numbers.
But now, it trades at just 15 times forward earnings. Meanwhile, revenue growth for the quarter is expected to be in excess of 50%. That combination of big growth and a low multiple is a favorable setup heading into earnings.
Secondly, we could see a bunch of “catch up” buying in the event of a blowout quarter.
MOMO stock currently sits right around where it was prior to last quarter’s earnings, meaning the stock hasn’t gained any value quarter to quarter. But fellow tech stocks have rallied about 10% since then.
That puts MOMO stock somewhat behind the curve of other tech stocks, meaning that good quarterly numbers could spark catch-up buying (investors making up for not buying over the past three months by buying in bulk after the report).
Third, MOMO stock just flashed the Golden Cross technical indicator, a bullish sign that momentum is starting to turn around in this name.
For those who don’t know, a Golden Cross happens when a short-term moving average (like the 20-day) crosses above a longer-term moving average (like the 50-day). It’s a sign that momentum in a stock is turning around.
Recently, MOMO’s 20-day moving average just crossed above its 50-day moving average. This is the first time the 20-day has been above the 50-day since August 2017.
Every time this Golden Cross pattern has emerged over the past several years, the stock was just beginning a breakout. One of those breakouts was the huge rally from $20 in January 2017 to over $40 in July/August 2017.
Bottom Line on MOMO Stock
As I’ve said before, MOMO stock is just like all those other red-hot Chinese internet stocks, but it’s much, much cheaper.
So if you’re looking for a way to play China’s big internet boom but don’t want to pay an insane multiple, this stock is the way to go.
As of this writing, Luke Lango was long MOMO.