The bull market has ended, but not for Meet Group (NASDAQ:MEET). Meet Group stock has been on a tear, tripling from its late-March lows. MEET stock is trying to clear $6 for the first time in almost two years.
The catalyst of late has been increasing optimism about the company’s decision to utilize much more video content.
The company’s new features appear to be boosting its growth. Preliminary Q4 numbers released earlier this month came in well ahead of MEET’s guidance. MEET looks poised to perform well in 2019.
That said, growth is starting to get priced into MEET stock. The shares don’t look terribly expensive relative to MEET’s revenue, particularly in comparison to dating-app leader Match Group (NASDAQ:MTCH).
But MEET’s earnings multiples aren’t as low: Meet Group stock is starting to price in an acceleration of its earnings growth.
As a result, the outlook of MEET stock looks to be tied to the performance of its video initiatives. If they meet expectations (no pun intended), MEET stock will rise. But if their early success fizzles, Meet Group stock could tumble again, just as it did when the company’s growth stalled out in 2017.
The Pivot to Video
In the crowded social networking/dating space (Meet Group is a bit of both), MEET has tried to differentiate itself through video. According to a presentation by MEET this month, the company’s live-video revenue has gone from $0 in Oct. 2017 to close to $6 million per month in December.
To further drive that growth, Meet has introduced “Battles”, in which two streamers, who could be singers, dancers, or comedians, compete to see who can get higher ratings from the audience. And in the first half of 2019, a “Levels’ feature, “which includes “aspirational ranks…and exclusive benefits” for users has added “a gamification element,” as the company put it in a recent release.
The video component of Meet Group’s apps is a key part of its growth outlook. Video users already comprise over 20% of its total user base, according to the company. Those users have driven a significant amount of user and revenue growth in recent quarters, helping to produce the above-expectations Q4 numbers, which resulted in an 8%+ rally by MEET stock.
And those video offerings differentiate Meet from other apps such as Facebook (NASDAQ:FB), whose video usage rates appear to be lower, and Match. Indeed, MEET has admitted that it’s using the same strategy as a number of other Chinese companies, including YY (NASDAQ:YY) and Momo (NASDAQ:MOMO).
But imitation is the highest form of flattery, and it’s worth noting that YY’s market capitalization is over $4 billion, while Momo’s market cap is over $5 billion. If Meet’s video strategy continues to drive user growth and higher revenue per user, its market cap, which is now about $410 million, might rise very quickly.
The Concerns About MEET Stock
That said, there are reasons to be cautious about MEET at this point. MEET stock has risen 25% in 2019 alone, and it’s up 200%+ from its March lows. And its fundamentals don’t seem to justify that kind of move.
Even after factoring in its strong fourth quarter, MEET’s growth looks relatively muted. The company’s guidance does suggest that its revenue will jump 44% this year, which is impressive. But its adjusted EBITDA is expected to increase less than 1%. In fact, its EBITDA guidance of about $31.8 million is less than 9% higher than its 2016 level.
In other words, Meet Group seems to be buying much of its recent revenue growth. Some of the spending increase was triggered by the company’s increased use of video. According to MEET, over 40% of its workforce is now dedicated to content management and user safety. Facebook is moving in that direction, and as a result Facebook’s market cap dropped by the largest amount in one day in the history of the stock market.
MEET’s margins are going in the wrong direction, and that’s a legitimate concern for the owners of MEET stock. Meet Group stock does trade at a notable discount to MTCH and FB in terms of price- revenue ratio. But when it comes to the companies’ price-earnings ratios, the gaps are much narrower. Since MEET has disappointed investors before, and the video pivot remains unproven, the valuation gaps make some sense.
Where Meet Group Stock Goes From Here
With an enterprise valuation-EBITDA ratio of about 16, MEET stock isn’t as cheap as its price-earnings multiples suggest. MTCH trades at a little over 20 times its EBITDA and, again, its margins are higher.
And so the case for buying MEET stock at its highs is reasonably simple. If its video initiative succeeds, Meet Group’s user base will increase, enabling it to better leverage Its spending, raise its margins, and increase its profits. And given MEET’s still-impressive revenue growth, the valuation of MEET stock will quickly increase.
If, on the other hand, its video efforts turn out to be somewhat of a fad, however, the outlook of Meet Group stock will get ugly in a hurry. Meet Group’s apps may be benefiting from the novelty of some of their offerings, and that trend may continue in 2019 .
But if that growth collapses, MEET’s valuation will probably drop to EV/EBITDA ratios of 10-12 at best, resulting in a 30%+ decline of MEET stock. In a worst-case scenario, Meet Group stock could fall back to its late 2017/early 2018 levels below $3.
I’m not interested in betting on MEET stock at these levels. Plenty of smaller internet companies have had brief periods of growth, only to flame out rather quickly.
Meet Group still has a lot to prove. But MEET stock can continue to rise if the company’s strategy works. And investors who think that will happen should believe that the rally of MEET stock is just getting started.
As of this writing, Vince Martin has no positions in any securities mentioned.