When Momo Inc (ADR) (NASDAQ:MOMO) reported third quarter earnings on Nov. 28 of last year, the company exceeded all analyst expectations. Not only did revenue hit another high again, but user activity is growing at healthy pace. Higher profitability is on the way as management adjusts its strategies.
Momo reported MAUs rising 22% year-over-year to 94.4 million. Though it had 3.1 million more in net additions, the per-user time spent only rose modestly. Momo is clearly resetting its business by reevaluating its business, in hopes of improving efficiency and quality.
Importantly, MOMO tweaked its business model to boost sign-ups. But it still needs more growth in user activity and sign-ups to make more profit. The company implemented a new marketing plan that makes use of its real-time data-monitoring and feedback solution.
By deliberately spending its time testing out existing and new channel partners, the company may indirectly bring its users back. The company said:
“However, we do believe that such adjustment is necessary for us to achieve higher quality of our top of the funnel addition and that’s through the more solid foundation for continuous community expansions.”
Bringing original content and building strong community ecosystems will raise the site’s “stickiness” with users. Momo is even working with professional agencies, seeking talent while updating its incentive plans. This will lead to the creation of quality content and diversity.
Last quarter, live streaming brought in record revenues of $303 million. Management attributed the strong results to the strong community. Some of the tools the site offers to its users to support a social infrastructure includes messaging and interest group pages.
Momo is like the Facebook, Inc. (NASDAQ:FB) of China but differs in that it relies on community groups and high-quality video content.
Driving Video-Centric Entertainment
Momo believes the revenue potential of ads alongside video content is high, but to get there, it must first refresh its mobile marketing business. The company is experiencing a low level of monetization of ads on the news feed level. So it is making video the centerpiece across the varying product modules on its platform.
In the third quarter, it rolled out a new algorithm that gives the best video recommendations. As the company evaluates the effectiveness of the content in real time, Momo will make sure the top-quality content is constantly exposed. Any needed adjustments are done in real time.
Already, the penetration rate of short videos is improving. In September 2017, that rate rose to 62%, up from 49% in the previous quarter.
Momo is pushing the boundaries of online social interactions by adding more tools. It will have chat rooms, social games, and audio/video-based services. These additions will increase the diversity of the offering while driving MAUs and user additions higher.
Sponsored special events will give the company the content it needs. Last quarter (in Q3), Momo held the Momo Golden Song Contest Season 2 with much success. Its sponsorship to winners allowed singers to produce singles, which are now on the Channel’s top online music platforms. This is a very effective way for the company to build its brand awareness.
The company is not limiting its talent search to singing alone. It is adding dancing and musical instrument performances, further diversifying its content categories while broadening its content. The more entertaining the material, the more engaged its users will be.
Valuation for MOMO Stock
The average price target is $40, based on 17 targets set by Wall Street analysts. Finbox.io users have a more conservative fair value of around $37 a share, which implies an upside of almost 31%.
Since Momo is in a revenue growth stage, the 10-year DCF Revenue Exit model is most suitable for estimating the company’s fair value. Assuming double-digit revenue growth until FY2020, followed by single-digit growth, MOMO stock has a fair value of around $37 a share.