Momo (NASDAQ:MOMO) will report earnings after the market closes on May 28. Analysts are projecting the company to post earnings of 34 cents a share. That would be over 20% less from the 44 cents EPS the company reported for the same period in 2019. After surging by over 10% between May 15 and May 19, MOMO stock fell again and is now down 42% for the year.
At first glance, that shouldn’t be a surprise. Although the U.S. did not begin to hear rumblings about a novel coronavirus until late in December, the virus was undoubtedly circulating in China in the fourth quarter of last year. It’s no surprise, then, that a business that relies on people eventually meeting face-to-face might struggle.
What can we expect this quarter? Momo has not been enjoying a resurgence that some Chinese stocks like Tencent (OTCMKTS:TCEHY) and Pinduoduo (NASDAQ:PDD) are enjoying. I expect the quarter to show more of the same from the previous quarter as the Chinese economy suffered greatly in the first quarter. The bigger question will be what we can expect going forward.
What Is Momo?
One aspect of Momo’s business is clear. Momo has a division, Tantan which is an online dating app called the “Tinder of China.” As somebody who is not a connoisseur of dating apps, I have no way of verifying that. However, it seems that Tantan has been in hot water with the Chinese government in the past few years.
As recently as last year, the Chinese government suspended news feed posts on both Tantan and Momo as part of an internal review. There is some concern about the reasons why the Chinese government was getting involved (words like prostitution were being used), and that could prove to be a tricky issue for the company.
The other part of Momo’s business, its namesake app, is a little less clear. It’s called a dating app but it also has elements of Instagram, Twitter (NYSE:TWTR), and TikTok. The app allows users to connect based on personal profiles and locations.
The app makes money largely by having viewers buy virtual gifts for their favorite broadcasters. Furthermore, both Momo and Tantan also make money from premium subscriptions.
The Business Is Struggling to Grow
In the conference call following its last earnings report, Momo management tried to put a positive spin on some troubling numbers with its core Momo app. In the fourth quarter, monthly active users (MAU), which is a critical metric for online apps, rose just 1% on a year-over-year basis. The app added 400,000 net additions and now sported 114.5 million MAUs. The company also said total paying users for the app reached 9.3 million.
But the reason I call this a positive spin is that the company also pointed out that Momo and Tantan have a high degree of “complementarity.” This basically means that Momo sees each app appealing to different audiences.
However, the opportunities that the company sees as growth opportunities may be more challenging than expected. One of the first growth opportunities the company pointed out was the hundreds of millions of dormant accounts. While it’s true that many dormant accounts can be an opportunity, but it’s also impossible to know why those accounts are inactive.
The company was also planning on seeing growth from lower-tier cities with the rollout of Momo Light. This is a similar strategy that e-commerce companies like JD.com (NASDAQ:JD) are taking. But it’s unclear if these lower-tier cities have as much enthusiasm for the app.
MOMO Stock and Covid-19
The company acknowledged the Covid-19 outbreak was adversely affecting the sentiment of high-paying users. Like Americans, many Chinese were sheltering in place. And a “significant portion” had yet to come back to big cities.
Momo relies on social interaction at a time when social interaction is being discouraged. I’m not sure the stock has a strong moat, if they have one at all. And their user base may not have further to grow. I wouldn’t put too much stock on anything that comes out of the earnings report.
But without a clearer picture of growth opportunities, I don’t see a reason to swipe right on MOMO stock.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.