Some companies are so hot that analysts who doubt them risk being branded as irrational or insane. Case in point is Chinese instant-messaging service Momo Inc (ADR) (NASDAQ:MOMO). Seemingly everybody loves MOMO stock, and for similar reasons: great growth story, an explosion of online dating in China and FOMO, or the fear of missing out.
Which makes me wonder, did anyone not drill into the numbers?
Maybe I’m just crazy. We’re going to find out soon enough on Wednesday morning, when Momo Inc releases their fourth-quarter earnings results. As InvestorPlace contributor and GameChangers editor Hilary Kramer reported, options traders anticipate strongly bullish news. Kramer writes that “The combination of a cheap multiple and big growth would seem to imply that MOMO is set up nicely for gains on Wednesday if it can top consensus expectations.”
Perhaps.
But I also have to question why so many market professionals are overwhelmingly bullish on MOMO stock. For instance, out of 16 covering analysts, five rank MOMO as a “strong buy.” Ten others classify it as a garden variety “buy,” so to speak. The lone analyst who isn’t recommending a position is on the sidelines with a “hold.”
I’m genuinely perplexed. Nevertheless, I have some hard numbers to share that you should know before taking a risk on MOMO stock.
Post-Earnings Boost for MOMO Stock Is a Myth
Kramer reported that MOMO stock is “likely to sizzle” on earnings day because the “options market is pricing in a 12% move — and that might be too conservative.” I’d like to know what these speculators are basing their trades on. I don’t want to pick a fight; I’m just curious.
But for those that don’t have too much money to burn — or want to avoid divorce papers — know this: over the past several quarters, MOMO shares’ post-earnings boost is a myth. Statistically speaking, you are much more likely to suffer a loss than you are to win big.
Going back to Q1 2015, MOMO stock’s post-earnings performance beat its pre-earnings performance only four times out of eleven quarters. Of those four times, the average post-earnings lift was 17.6%, which is admittedly high.
However, the two best performances averaged 30%, while the least two performances averaged 5.4%. Talk about feast or famine!
To be fair, the average losses on the seven losing quarters amounted to 10.9%. Thus, the magnitude of losing is shallower than the magnitude of winning. That said, the statistics imply that you’re going to lose 64% of the time, which are not great odds.
Oh, and by the way, MOMO stock registered an earnings beat in ten out of the last eleven quarters.
Momo Has Absurdly Strange Social Media Growth
When it comes to social media companies, I tend to rag on Twitter Inc (NYSE:TWTR) and Snap Inc (NYSE:SNAP). As popular as these platforms are, particularly with youth, their active user growth rates demonstrate stagnation. In contrast, Facebook Inc (NASDAQ:FB), with its two-billion plus subscribers, is continually adding fresh blood.
Still, one thing I can say positively about Twitter and Snapchat is that their platforms are growing, albeit more slowly. This makes perfect sense: social media apps have a burst of popularity in their inception, and then they mature.
According to Statista.com, Momo had 84.2 million subs in the final quarter of 2013. By June of the following year, subs fell to 52.4 million. Statista’s latest information notes that Momo had 91.3 million subs on June 2017.
Let’s set aside the old data point for a second. This means that the social media company grew subs by only 8.4% over a three-and-a-half year time span! Furthermore, in March 2016, Momo Inc had 72.3 million monthly active users. By logical deduction, it was only until fairly recently that the company entered a legitimate growth phase.
And yes, the data is old, but that’s not my fault! China’s English-language Global Times also uses these same, old statistics.
To me, this gyrating growth is just plain weird, especially when China has no shortage of people. Are you sure you want to buy MOMO stock?
MOMO Stock Is a Wild Ride
The broader markets have an upside bias. Furthermore, if you look at established blue-chip names, they’re more likely to win than they are to lose.
MOMO stock is a different animal. On any given day, shares will trader higher than the previous session 49% of the time. However, shares will trade lower 50% of the time, and stay dead-even the remaining 1%.
That might not come as a surprise to you, but maybe it does. I’m telling you this information so that you’re prepared for a wild ride if you decide to jump aboard. MOMO stock certainly has the possibility of becoming the next Alibaba Group Holding Ltd (NYSE:BABA) in terms of profitability. Or, the company could end up being MySpace.
I, for one, am staying out of this “opportunity.” Mostly, opinions, speculation and implications are driving MOMO stock. Unfortunately, the hard numbers provide a contrasting tale.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
