Momo Inc (ADR) (NASDAQ:MOMO) reported what appeared to be a stellar second-quarter earnings report on Monday. Not only did the numbers blow analysts’ top- and bottom-line estimates out of the water, but management also raised guidance for the current third quarter. Still, investors were quick to smash the shares, sending MOMO stock down 20% the following day.
Growth certainly wasn’t the issue here, as the Chinese social networking company reported adjusted earnings that nearly tripled year-over-year and revenue that was up 215%. Third-quarter revenue guidance was also ahead of the $307 million consensus, with management providing a forecast of $337-$342 million.
The only real surprise was the fact that MOMO stock fell so much the following day. But when you take a step back and look at the big picture, it may not have been that much of a surprise at all.
Shares have fallen after three of the company’s last four quarterly beats. Plus, prior to Monday afternoon’s release, MOMO was up 145% year-to-date. This looks like a case of “buy the rumor, sell the news.” It could also be a bit of profit-taking.
Two Things to Watch
Whether or not the selloff was justified will be determined in the months ahead. The big growth numbers do suggest that MOMO could be a buying opportunity amid this weakness.
But before you start pulling the trigger, there are two areas of caution worth keeping an eye on.
First, Momo’s costs and expenses have been increasing lately, and during the last two quarters they have outpaced revenue growth and monthly active user growth. This is something investors will want to pay close attention to throughout the remainder of the year.
Then there is the chart. Because I don’t want to catch a falling knife, I want to wait and see if MOMO stock can build a base before considering stepping in.
As you can see above, the stock has important support between $33 and $35 (the black lines). If it can build a base in that area over the next week or two, it could be time to start buying again.
Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt just launched two new investment advisories focused around the “next” generation investing theme. His trademark three-prong investing approach targets the mega-trends old Wall Street is missing out on. Click here for more information on the “NexGen” Experience.