Strong Q4 Numbers Put Momo Stock on a Path to $50

The rally of MOMO stock may have just begun

MOMO stock - Strong Q4 Numbers Put Momo Stock on a Path to $50

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Momo (NASDAQ:MOMO) stock popped on Tuesday, after the Chinese social-networking giant reported fourth-quarter numbers which easily topped expectations.

Source: Shutterstock

MOMO also delivered far-above-consensus first-quarter revenue guidance. Investors celebrated the strong numbers, and MOMO stock jumped more than 10% in response to the news.

In the big picture, there were a lot of positives in Momo’s  Q4  numbers beyond the headline beats. Revenue growth, user growth, and paying-user-growth trends all remain healthy. Margin trends are improving. MOMO is increasingly shifting away from volatile, virtual-gift revenue, and towards much more predictable subscription revenue. The company’s profits continue to soar.

Despite all those positive developments, MOMO stock remains dirt cheap. Following the company’s Q4 results, next year’s consensus earnings-per-share estimate will likely rise to around $3. Thus, even at $36, MOMO stock still trades at just 12 times its forward earnings. A forward multiple of 12 is just too cheap for a company whose revenues are growing at a 50%-plus rate, with a top-line outlook that is becoming clearer, and margins that are turning the corner.

As a result, this rally of MOMO stock isn’t over yet. MOMO’s fundamentals indicate that MOMO stock could reach $50 in 2019. The stock’s technicals support a similar rally, meaning that no matter which way you look at it, it’s worth buying MOMO stock in the midst of its rally.

All of MOMO’s Trends Are Good

In the big picture, all the trends that affect MOMO stock are healthy. Consider the following:

  • In Q4, MOMO’s revenue growth again exceeded o50%.
  • Monthly active user growth slowed to 14%, but, with over 100 million MAUs, Momo is one of the most used social-networking apps in China, and its user base is still growing at a double-digit percentage rate.
  • Paying user growth remained huge in Q4, and Momo has a tremendous opportunity to monetize more of its users, as only 11% of its MAUs are paying users.
  • Average revenue per paying user is going up, and the company’s subscription-based live video revenues, which rose 36% YoY,  now comprise over 75% of its total revenues. Virtual gift-related revenue represented just 19% of its revenue in Q4.
  • Its margins dropped, but by less than last quarter. Management is also implying that its margins will reach a positive turning point next year as certain one-time investments phase out.
  • The macroeconomic fundamentals of China are improving, and its internet penetration rates are significantly below-average.

Overall, all the trends are moving in the right direction for Momo. This is a hyper-growth company with a huge user base, increasing revenue visibility, and margin improvement potential in a digital economy that is still rapidly expanding. Those fundamentals imply that MOMO will grow rapidly for a long time , making MOMO stock look way too cheap at its current levels.

Upside To $50 Looks Likely

From multiple vantage points, MOMO stock has a good chance to reach $50 in 2019.

When it comes to fundamentals, the company’s long-term earnings growth potential indicates that MOMO  can reach $50 in 2019. Momo has clearly established itself as a social-networking site with staying power and increasing relevance in China’s still-expanding digital economy. As that digital economy expands over the next several years, and as MOMO converts more MAUs into paying users, its revenue will continue to trend significantly higher, likely at a 15%-20% annualized rate.

Meanwhile, its operating margins will likely stabilize this year, and slightly improve thereafter as the company expands. As a result, Momo’s EPS could trend towards $5 by fiscal 2025. Based on a forward price-earnings multiple of 16, which is average for the market, that equates to a fiscal 2024 price target for MOMO stock of $80. Discounted back by 10% per year, that equates to a fiscal 2019 price target of just under $50.

On the technical side, MOMO stock has established a well-defined level of support in the lower $20’s, and a well-defined level of resistance in the mid-to-upper $40’s. Put simply, the stock has bounced between those two levels multiple times over the past two-plus years. MOMO stock is currently bouncing off its lower-$20’s support level. If history repeats itself, this rally could reach the mid-to-upper $40’s, or even the lower $50’s.

The Bottom Line on MOMO Stock

Largely due to the lack of  certainty of its top-line outlook, declining margins, and macroeconomic headwinds, MOMO stock sank to deeply undervalued levels in late 2018. Now, the stock is bouncing back. Revenue visibility is improving. Margins are showing signs of improving. Macroeconomic headwinds are easing.

As long as these trends remain favorable (and they should do so for the remainder of 2019), then  MOMO stock will continue to rally strongly. It’s simply too cheap, considering the company’s long-term growth potential.

As of this writing, Luke Lango was long MOMO. 

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