Actions taken by the Chinese government caused Momo (NASDAQ: MOMO) stock to slide on Monday. App stores removed Tantan, a Chinese version of the wildly successful Tinder App, on the direction of governmental authorities.
Momo bought Tantan last year for over $600 million. The app’s removal is very disturbing for the owners of MOMO stock. Though the valuation of MOMO stock is not excessive, Tantan’s weakened near-term prospects could disrupt Momo’s growth.
MOMO bought Tantan last year, a move that caused its stock price to surge to $53.41, near its 52-week high. The acquisition strengthened Momo’s social networking products.
Latest Setback
The Chinese government’s order to various mobile app stores to remove Tantan is puzzling. The surprising turn of events is a reminder that political decisions can cause Chinese stocks to drop. Until Momo discloses the reason for Beijing’s action, MOMO stock could drift lower. Momo wrote in its press release that it will cooperate with authorities in an effort to bring the Tantan app back online as soon as possible.
App Value Discounted From Share Price
That MOMO stock fell around 7% on the day suggests the market is willing to remove the entire value of Tantan from MOMO stock until the issue is resolved. Research firm Jefferies wrote that app shutdowns last between two weeks and one month. If true, then MOMO could rally back to the $35 – $40 range a month from now. Still, it is worrisome that the government would just have the app removed without any warning.
Strong Fundamentals
Momo has strong fundamentals that were reaffirmed when MOMO reported its fourth-quarter results. It reported earnings per share of $0.60, driven by the 44.7% year-over-year growth of its revenue to $559 million. Operating income grew by 30%, due mostly to government incentives. MOMO delivered these strong results despite its higher sales and marketing costs associated with the consolidation of Tantan.
Live streaming technology helped Momo extend its growth. Revenue from its live streaming business jumped 36% YoY. User retention improved due to the addition of an audio chat room and karaoke in 2018.
Strong Contribution From Tantan
In Q4, Tantan added 300,000 paying users, bringing the total number of its paying users to 3.9 million. The app’s revenue grew 36% sequentially to RMB223 million (USD $48 million). The unit benefited from higher retention levels as the company implemented growth optimization tools and made improvements to the app’s algorithm. The launch of Tantan’s VIP subscription service drove its subscription growth last year.
Outlook
Momo predicted that the growth of its value-added services (VAS) business, which includes virtual gifts, would outpace that of all of its other business lines. And after facing some macro headwinds in the latter part of 2018, management is comfortable with the lower average revenue per user of its VAS business.
Momo’s AI team, along with the build-out of a data tracking system, will lead to higher ROI, accelerated subscription growth, and higher operating efficiency. The company had been revamping the user experience of Tantan. But after the app’s latest setback, Momo may not realize any benefits from the revamp for awhile.
The Valuation of MOMO Stock
Analysts did not yet revise their price targets on MOMO stock to reflect the news about Tantan. The average price target on MOMO stock is about $45 (per Tipranks), approximately 25% above its current levels. More astute investors may want to use a DCF Growth Exit model to estimate the fair value of MOMO stock. If the company’s revenue growth slows to about 5% in four or five years, then, according to the model, MOMO stock is trading close to its fair value (per finbox.io).
The Bottom Line on MOMO
Investors who hold MOMO shares should wait for more news on the removal of Tantan before doing anything. If Momo can make the app available again, MOMO stock could recover soon afterward. MOMO is scheduled to report its earnings on May 28. Another strong report would also help MOMO stock rebound.
As of this writing, the author did not hold a position in any of the aforementioned securities.
