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Until August, Momo Inc (ADR) (NASDAQ: MOMO ) was part of a group of Chinese online companies that could seem to do no wrong. But unfortunately, Wall Street got spooked. There were two earnings reports that showed a steep deceleration in the growth ramp. There was also the unexpected resignation of three board members. As a result, Momo stock went from $46 to $27.
But could this be a buying opportunity? Perhaps Wall Street has overreacted when it comes to Momo stock?
Well, to see, let's take a deeper look at the company. First of all, it's important to keep in mind that MOMO has been undergoing a transformation. Once primarily focused on online dating - much like Tinder from Match Group Inc (NASDAQ: MTCH ) - there has been a shift toward live video and other social media.
Yet the process has been far from smooth. Let's face it, the consumer mobile world is highly fickle. And besides, the Chinese market is intensely competitive. Just some of the operators include Weibo Corp (ADR) (NASDAQ: WB ), YY Inc (ADR) (NASDAQ: YY ) and Yingke . They all have continued to grow at robust rates.
It also does not help that Alibaba Group Holding Ltd (NYSE: BABA ) has been a big seller of Momo stock. As of April of 2016, the company had unloaded over $1 billion of its stake !
And of course, there is the wild card of the Chinese government, which has a penchant for clamping down on social networks. This is even more of a risk with live video.
Positives for MOMO
It's certainly true that MOMO faces some tough challenges. But then again, there are still some positive factors as well. One is that the top line will likely remain at attractive levels. Consider that the guidance for the remaining part of the year is anywhere from 50% to 56%.
Granted, this is nowhere near the recent blistering rate of 126%, which came in Q3. But hey, the rate is nothing to sneeze at.
Something else is that MOMO continues to invest in innovating its platform. For example, the latest version of its platform has seen some interesting updates, which should help increase engagement and user growth.
There is a one-on-one fast chat feature as well as group video streaming (this is for playing highly popular games like Werewolf ). MOMO has also added a video content recommendation engine and video production tools.
All these efforts with live video are in the early phases and will likely take time to refine. But MOMO has proven to be adept at monetizing traffic.
Bottom Line on Momo Stock
During Q3, the mobile marketing revenues actually dropped by 1% to $17.4 million. But this is to be expected, as the market has gotten saturated. In other words, MOMO's rethinking of its platform makes a lot of strategic sense. So over time, the newer businesses should help to overcome the sluggishness with mobile marketing revenues.
In the meantime, MOMO has had little trouble generating strong profits. During the latest quarter, the earnings per share jumped from 24 cents to 45 cents (the Street consensus was for 38 cents).
So with the drop in the Momo stock price, the valuation really does look compelling right now. Consider that the forward price-to-earnings multiple is mere 12.5x. To put this into perspective, BABA is at 28X, and JD.Com Inc(ADR) (NASDAQ: JD ) trades at 52x.
Thus, it does look like the bad news is already baked into Momo stock - and then some. As a result, for investors looking for an interesting value play on social media in China, MOMO shares do look very interesting right now.
Tom Taulli is the author of High-Profit IPO Strategies , All About Commodities and All About Short Selling . Follow him on Twitter at @ttaulli . As of this writing, he did not hold a position in any of the aforementioned securities.
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