The China internet growth narrative remains red-hot. And Momo Inc (ADR) (NASDAQ:MOMO) is even hotter.
That represents a pretty big shift in sentiment. The China internet growth narrative (the story of China’s massive working class urbanizing and digitizing, getting phones and social media accounts, and doing online shopping) has been on fire for the past several years. But Momo stock wasn’t invited to the party.
While the likes of Alibaba Group Holding Ltd (NYSE:BABA), JD.Com Inc (ADR) (NASDAQ:JD), Tencent Holdings Ltd (OTCMKTS:TCEHY), Weibo Corp (ADR) (NASDAQ:WB) and Baidu Inc (ADR) (NASDAQ:BIDU) were roaring to new highs in the back-half of 2017, MOMO stock was plunging to 12-month lows on China regulation concerns.
But Momo stock got way too cheap. And investors started gobbling it up. Then, the company reported yet another double-beat quarter that illustrated just how little effect regulators are having on the company’s operations.
All together, MOMO stock has surged from $22 to $37 over the past 3-4 months. That is a huge, 70% rally in a hurry.
Is it over? Far from it. Maybe the stock takes some time to cool off after such a torrid run higher, but the fundamentals remains strong, and the stock remains cheap. This rally in MOMO stock will last for a lot longer.
Cheapest Way to Play Internet Usage Boom in China
MOMO just reported a really good quarter.
Total revenues jumped 57% higher, led by robust growth in both live video services and value-added services. The company’s monthly active user base grew by more than 20% year-over-year. Average time spent per user was up 14% YOY. Total paying users on the live video and value-added fronts increased by more than 20% and 30%, respectively.
Margins remained healthy (net profit margin of 28% for the year), despite huge investments into future business growth, allowing operating profits to grow basically 25% YOY.
All in all, it was yet another solid quarter, and growth isn’t expected to come down in any meaningful way any time soon. Revenue growth is expected to be nearly 50% again next quarter.
Growth will remain big not just next quarter, but over the next several quarters. For all intents and purposes, Momo is like China’s version of Tinder (the dating and match-making component) meets YouTube (the live-video component).
Both of those apps have experienced tremendous success in the United States. As China’s consumer landscape starts to look more and more like America’s, then the Chinese version of Tinder and YouTube should likewise experience tremendous success.
Moreover, with a user base under 100 million that is growing at a 20%-plus clip, the runway for further growth ahead for MOMO is quite enticing. Fellow social media apps like Weibo (nearly 400 million users) and WeChat (nearly 1 billion users) are far bigger, implying that Momo is tapping into only a fraction of its addressable market.
The best thing about Momo stock is the valuation. Margins are under pressure and are expected to remain under pressure as the company invests into its platforms and content. But with revenue growth at 50%, MOMO doesn’t need margin expansion to drive the stock higher.
After all, Momo stock is trading at just 17-times forward earnings. Last quarter, 57% revenue growth turned into 25% profit growth.
Even if we assume similar levels of compression (although margin compression is expected to moderate), then 50% revenue growth should flow into roughly 20% profit growth. At 17 times forward earnings, that means MOMO stock is trading at a price-to-earnings/growth (PEG) ratio of under 1.
That is just too cheap. Even under conservative assumptions.
More realistically, margins stay under pressure this year, but then start to race higher over the next five years as the company reaches scale and benefits from the expense leveraging that comes from a huge revenue base. If that is the case, then analysts are right, and earnings growth in a long-term window should look more like 35%.
A 35% growth stock trading at 17 times forward earnings is an absolute bargain.
Bottom Line on Momo Stock
Momo stock is a dirt cheap, a 50%-plus revenue growth stock with direct exposure to China’s booming digital economy.
Sentiment has finally turned on this name as China regulation concerns have taken a back seat to the still-powerful growth narrative. Therefore, so long as the China internet growth narrative remains strong, then MOMO stock has a ton of room to fly higher.
As of this writing, Luke Lango was long MOMO, BABA, JD, WB and BIDU.