Shares of Momo (NASDAQ: MOMO) have rallied nearly 60% so far this year as investors have warmed up to certain Chinese tech stocks again. Yet Momo remains almost 30% below its 2018 highest levels, and it still looks cheap at 11 times forward earnings.
Will Momo's recovery continue and propel the stock to new highs? Let's take a closer look at its business to find out.
Meet the "Tinders of China"
Momo's main app lets users find each other through personal profiles and shared locations. The app is often used for online dating. Momo also owns Tantan, a dedicated online dating app that licenses some of Tinder's features from its parent Match Group (NASDAQ: MTCH) .
Momo's core growth driver is its streaming video platform, launched in 2017. Its top broadcasters attract dedicated fans, and Momo monetizes these streams by selling virtual gifts, which viewers buy for broadcasters. Momo splits these revenues with its broadcasters.
The company also monetizes Momo and Tantan's dating features with premium subscriptions with perks like better matches and higher search-exposure rates. Momo also expanded its video business by producing a new reality show called Phanta City .
How fast is Momo growing?
Momo's year-over-year revenue growth stayed above 50% over the past year. However, its growth in the second quarter onward was boosted by its takeover of Tantan, which closed last May .
Revenue growth (YOY)
Data source: Momo quarterly reports. YOY = year over year.
During the fourth quarter, Momo's total monthly active users (MAUs) rose 14% year over year to 113.3 million. Within that total, paid users of its live video and other value-added services (without double-counting users of multiple services) grew 67% to 13 million. Of those paid users, 3.9 million came from Tantan.
Momo generates most of its revenue from its live video platform and value-added services, but a smaller amount still comes from its older mobile marketing and gaming businesses. As seen in its fourth-quarter figures, Momo is gradually winding down those businesses to focus on the growth of its newer businesses.
2.96 billion yuan
722.4 million yuan
122.1 million yuan
25.5 million yuan
14.6 million yuan
Data source: Momo Q4 report.
The big spike in its value-added services can be attributed to the expansion of its online dating ecosystem. Its "other services" revenue mainly came from Phanta City .
Momo's non-GAAP operating income (which excludes costs related to the integration of Tantan) rose 30% year over year during the quarter, buoyed by the company's focus on higher-margin services and government tax incentives.
Momo's non-GAAP net income rose 22% to 887.4 million yuan ($129.1 million), as its GAAP net income (which includes Tantan costs) rose 2% to 660.8 million yuan ($96.1 million). Momo also declared a special cash dividend of $0.62 per American depositary share during the quarter, which will be paid to shareholders (who held the stock as of April 5) on April 30. That equals a one-time yield of about 1.6%.
A rosy outlook and low valuation
Momo expects its revenue to rise 28% to 32% annually on a yuan basis during the first quarter. Wall Street expects its revenue and non-GAAP earnings to improve 25% and 20%, respectively, this year on a dollar basis.
Those growth rates represent a deceleration from 2018 growth, but they're still high relative to its forward P/E of 11. By comparison, Momo's live video peerYY (NASDAQ: YY) trades at 10 times forward earnings, but analysts anticipate an 8% earnings decline this year due to higher expenses and a dependence on lower-margin services.
Does Momo still have room to run?
Momo's growth is decelerating, but its stock still looks cheap relative to its growth potential. The company holds strong positions in the online dating market, it has a small but growing base of paid users, and it's gradually replacing its lower-margin businesses with higher-margin ones.
I think Momo should climb higher this year, so long as the yuan doesn't continue to depreciate and trade tensions between the U.S. and China don't escalate. I definitely wouldn't buy Momo as a core holding, but I think it's a good speculative play that might head higher over the long term.
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