Social App Momo Shines on U.S. Debut with Alibaba Support - Analyst Blog

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Alibaba Group Holding Limited ( BABA )-backed Chinese social media firm Momo Inc.'s initial public offering on Thursday was an impressive one. Trading with the ticker MOMO, shares of the company surged 26% to $17.02 on December 11. The IPO was priced at $13.50.

An Introduction to MOMO

Launched in 2011 by Tang Yan, Momo is a mobile instant messaging app that lets users post their pictures and profiles. In Chinese, Momo means unacquainted and it is sometimes referred to as China's Tinder. Tinder is a popular U.S. dating app that allows users go through pictures of people in their area.

Momo is basically SnapChat, and ( FB ) brewed together. It informs users about others with "common interests" nearby. Users also meet in groups and on message boards. This is not all, Momo offers games as well.

The app is free. But users can upgrade to get "VIP logos," advanced search and the right to follow more users for $18 a year.

According to the IPO filing, the app had 180.3 million registered accounts, 60.2 million monthly active users (MAU) and 2.3 million paying subscribers at the end of September.

The Magic Behind Momo

Was it Alibaba's Midas touch that turned Momo's stock into gold? Or is there more to Momo?

Momo has witnessed tremendous growth in a span of just three years. It ranks third among Chinese social networks. Last year, it saw a whopping 161% growth in registered users, a 113% growth in MAUs and a 141% growth in daily active users (DAUs). The company's paid subscriber base is up from 300,000 a year ago.

User engagement has also been impressive as a DAU spends about 34 minutes per day on the service.

For the first nine months of this year, Momo booked revenues of $26.2 million evev though the net loss was $22.9 million.

The future looks bright, too.

Momo is currently making money via charging membership subscription fee for premium services; collecting fees on digital game revenue on its platform and by selling online emoticons and stickers.

As Alibaba is a major shareholder, there is a possibility of Momo and Alibaba making an e-commerce deal. This would significantly step up Momo's monetization efforts and make Momo profitable.

According to eMarketer, the number of mobile Internet users in China is estimated to hit 712.4 million in 2017, representing a 21.7% compound annual growth rate.

Besides the remarkable growth prospects, it has reputed patrons.

Alibaba has a 20.4% stake in Momo, post the IPO. One of Alibaba's co-founders and one of its top managers are on Momo's board.

Other investors are venture capital shops Matrix Partners and Sequoia. Matrix owns a 17.7% stake while Sequoia owns a 5% stake. Chinese online marketplace Inc. has a minor stake.

With a growth rate like that and such high profile investors, what could possibly go wrong with Momo?

The successful IPO is just slightly marred by the fact that its co-founder Tang Yan has been accused of breaking his employment contract by Chinese gaming firm NetEase Inc. where he worked for almost eight years until Sep 2011.

In a statement released last week, NetEase claimed that Yan launched Momo without authorization in Jul 2011, while he was still an employee of the firm. The company also accused Yan of directing funds to an advertising business owned by his wife.

Will History Repeat Itself?

Let's look at the performance of some Chinese social offerings.

Weibo Corp. ( WB ), often touted as the Twitter Inc. ( TWTR ) of China, lost about 20% of its value since its IPO in April.

Renren Inc , Facebook's counterpart in China, is down 84% since its IPO.

The excitement surrounding the IPOs generally over-extends the valuations of these kinds of firms. But as time passes, the enthusiasm fades as investors move on to the next hot deal.

So even if you want to buy Momo shares, it's probably best to wait a few quarters. If history is to be given importance, there's a good chance that you'll get a better valuation.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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