Why It’s Not Too Late to Buy MOMO Stock

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MOMO stock - Why It’s Not Too Late to Buy MOMO Stock

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Momo (NASDAQ:MOMO) stock’s wild ride is continuing. The Chinese social media company has undergone massive surges and breathtaking swoons since the beginning of last year. Now, MOMO stock has begun to recover from a recent dive that was caused by investor uncertainty. Although the risks posed by MOMO stock remain real, the potential opportunity it offers appears too compelling to ignore.

MOMO Stock Offers Huge Growth at a Low Valuation

After reviewing MOMO’s phenomenal growth, few people would think that it is only seven years old. Other mobile-dependent social media platforms arrived on the scene before Momo. However, the company’s grouping of people based on both their proximity and interests makes it stand out.

After launching with zero users in 2011, the site had 10 million registered users by the time the company reached its first anniversary. By 2016, about 180 million people had registered with the site. The number of monthly active users (MAUs) reached 91.3 million by June 2017.

Like its counterparts in the U.S. such as Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR), Momo derives revenue from multiple sources. Videos, value-added services, gaming, and mobile marketing drive most of the company’s revenues.

These sources helped the company quickly become financially successful. By 2015, MOMO had turned profitable, and its profits have increased ever since. Wall Street expects its profits to rise by 44.6% this year and by 26.2% next year. Analysts expect the company’s five-year average annual growth rate to come in at 28%.

MOMO stock also trades at a very cheap valuation, considering its growth. Based on the consensus 2018 earnings estimate of $2.56, Momo is trading at a forward price-earnings ratio of 17.5.

Risk Fears Hurt MOMO Stock in Recent Months

MOMO stock also remained largely unaffected by the U.S.-China trade war that has caused China’s SSE Composite Index to enter bear market territory. However, a correction reduced the price of MOMO stock by over one-third between the middle of June and mid-August.

Analyst downgrades hurt the stock. So did Spruce Point Management’s belief that MOMO posed “serious risks” and its allegations that the company has hidden a significant amount of information from investors. However, recently the stock has again begun to surge. Between August 15 and August 29, the stock moved from a low of just under $35 per share to over $47 per share.

Spruce’s concern about the risk posed by Momo does have some merit, as few American investors can conduct truly thorough due diligence of the company, since most Americans do not understand the Mandarin language or Chinese cultural, business, and regulatory practices. Misunderstandings caused by these issues have also dogged other Chinese companies such as Alibaba (NYSE:BABA) in recent months.

Why MOMO’s Risk Is Tolerable

That said, investors must also remember that this stock trades at just 17.5 times forward earnings, while its American peers trade at much higher multiples. In other words, the market has incorporated at least some of this risk into the price of MOMO.

Moreover, investors should realize that SEC regulations reduce the risks posed by MOMO. Furthermore, buyers can also protect themselves by purchasing relatively few shares of MOMO or by hedging their positions through put options.

Still, investors now appear to be more comfortable with the risks posed by MOMO . Given the stock’s recent rally, it looks much of the fear of MOMO’s risks has subsided. Also, the stock still trades about 19% below its 52-week high. As a result, even those who missed the recent surge can still benefit from a rebound.

Final Thoughts on MOMO

Investors should remain aware of the risks posed by MOMO, but they should also not ignore the shares’ value proposition. By just about any measure, Momo has grown massively since its founding. Even as Momo becomes larger, it maintains a growth rate of well over 10%. Moreover, the stock’s valuation is attractive.

However, the risks posed by MOMO remain a concern, as downgrades and allegations caused a selloff in the stock this summer. Although investors should always honestly assess risks posed by stocks, they should protect themselves from these risks rather than ignore the value proposition of MOMO stock. Few other stocks can match the low multiple and massive growth offered by Momo.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/late-buy-recovery-momo-stock/.

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