China tech giant Momo (NASDAQ:MOMO) reported stellar second-quarter numbers Wednesday, and MOMO stock rallied big in response. As of this writing, MOMO stock is up more than 7%.
This could be a big turning point not just for MOMO stock, but for all China tech stocks, too.
Long China tech stocks were once one of the more crowded trades on Wall Street. But escalating trade war tensions and a strengthening dollar caused China tech stocks to lose their shine. Over the past several weeks, a handful of big China tech stocks like Weibo (NASDAQ:WB), Baidu (NASDAQ:BIDU), Baozun (NASDAQ:BZUN) and 58.com (NASDAQ:WUBA) have all reported strong double-beat quarters and given healthy guides.
Those stocks largely failed to rally after the quarterly print in a sign that, despite strengthening fundamentals, investor appetite for China tech stocks is low.
That may be changing.
MOMO stock is popping big-time on great second-quarter numbers. WB, BIDU, BZUN and WUBA are also all up in response to MOMO’s report. Indeed, most of these stocks have shown impressive strength over the past several days.
Time to buy back into MOMO stock and other China tech stocks? I think so.
Momo’s Quarter Was Really Good
There is no other way of looking at Momo’s second-quarter report other than “it was really good.”
It was a clean double-beat-and-raise quarter that comprised nearly 60% revenue growth and 90% profit growth. Those metrics are in line with what the company has reported over the past several quarters, so operational momentum isn’t slowing (profit growth is actually accelerating by quite a bit as margins are soaring higher).
The live video service business, which many pundits thought was going to cool thanks to China government regulation, remains red-hot. Revenues in that business rose 58% year-over-year. Meanwhile, the nascent value-added services business continues to ramp with impressive pace (revenues up 124%), a testament to this company’s diversified ability to monetize users.
Speaking of users, Momo’s monthly active user base rose 18% year-over-year, a healthy rate considering the company is going against tougher laps and growing on a bigger base.
Overall, Momo’s quarter was really good and underscored that this platform is just scratching the surface in terms of its monetization potential.
China Tech Stocks Are Bouncing Back
The narrative supporting MOMO stock is the same as the narrative supporting all China tech stocks.
China has a ton of people. All those people are urbanizing and digitizing. This shift is happening right now, implying a huge boom in China’s internet economy.
Think e-commerce, social media, digital advertising, internet entertainment, digital travel agencies, so on and so forth.
Meanwhile, China household expenditures per capita remain a fraction of U.S. household expenditures per capita, so the runway for China’s internet economy to keep booming remains quite long and promising.
We are seeing this in quarterly numbers across all of China tech. By and large, the numbers have remained really good, with robust revenue growth driving sustained big profit growth.
Investors have been hesitant to buy into China tech recently because of escalating trade war tensions and a strengthening dollar. Those concerns now seem to be blowing over.
Namely, the U.S. dollar, which started strengthening in April, appears to be cooling off finally after testing highs not seen since late 2016.
If the dollar continues to drop, investors will move their attention back to the fundamentals supporting China tech stocks. In that scenario, these stocks could rally by a bunch.
Just look at MOMO stock, WB stock or BIDU stock … all of these stocks are trading below 30 times forward earnings. Yet, revenue and profit growth at each is well over 30%, and revenue growth is closer to 50%-plus in the case of WB and MOMO.
In other words, these are big growth stocks trading at low-growth valuations. Eventually, those fundamentals will power these stocks higher.
Bottom Line on MOMO Stock
Momo’s second-quarter print could be the turning point for China tech stocks. Not only did MOMO stock pop on the news, but so did a bunch of other China tech stocks. This continues what has been a multi-day rally across the whole sector that has run concurrent to a drop in the U.S. dollar.
As long as the dollar keeps dropping, China tech stocks should power higher.
As of this writing, Luke Lango was long MOMO, WB and BIDU.