Personal Finance

Will Momo Stock Sink or Swim?

A young woman takes a selfie with two friends.

Chinese social media company Momo (NASDAQ: MOMO) recently posted impressive second-quarter earnings that crushed analyst estimates on the top and bottom lines. Yet the stock, which has already more than doubled this year, fell 20% following the report -- presumably on concerns about its rising expenses, slowing growth, and rich valuation.

I previously highlighted Momo as a great growth play on the Chinese tech market but also warned that it would be a volatile investment. Does Momo's recent dip represent a buying opportunity for long-term investors?

A young woman takes a selfie with two friends.

Image source: Getty Images.

Why Momo could sink . . .

Momo's namesake app lets users find each other via personal profiles and location-based data. Since it's often used for dating purposes, it's commonly called the "Chinese Tinder". It also owns a live video-streaming service, through which viewers can buy virtual gifts for their favorite content creators, and a mobile gaming platform.

Monthly active users (MAUs) rose 22% annually to 91.3 million last quarter, but that's still tiny compared to bigger social media apps like Weibo (NASDAQ: WB) and Tencent 's (NASDAQOTH: TCEHY) WeChat -- which respectively have 361 million and 963 million MAUs. As Weibo and WeChat expand their ecosystems into the live-streaming market, they could eventually marginalize Momo.

The company is fighting to keep up with its bigger rivals, reporting costs and expenses surging 189% annually to $246 million (79% of revenue) last quarter due to higher broadcaster revenue shares, payment channel fees, marketing and promotional expenses, infrastructure expenses, and the ongoing expansion of its workforce. Any additional competitive pressure is likely to worsen the situation.

Meanwhile, Momo's revenue growth is slowing down, rising 215% year over year to $312.2 million last quarter, but that marked its slowest growth rate in five quarters . Management expects this deceleration to continue with 115% to 118% sales growth for the current period, indicating that rising expenses could eventually eclipse revenue growth.

As a result, earnings have been wobbly. While non-GAAP earnings almost tripled to $0.35 per share last quarter, but that represented a 20% decline from the previous quarter.

Momo's mobile app.

Momo's mobile app. Image source: Google Play.

. . . and why it might swim

While the slowdown in growth is disappointing, we can't expect Momo to put up triple-digit growth rates forever. As things stand now, its core businesses are firing on all cylinders.

Live video service revenue soared 348% year over year to $259.4 million last quarter; value-added services (membership subscriptions and virtual gifts) revenue rose 58% to $24.6 million; mobile marketing revenue grew 15% to $19 million; and mobile gaming revenue climbed 23% to $9.1 million.

Cash and equivalents went up from $651.3 million at the end of fiscal 2016 to $846.3 million last quarter. That growing war chest, along with its clean balance sheet, gives the company room to expand via acquisitions. With a fairly low market cap of $7 billion, Momo also remains a potential buyout target for bigger tech companies like Weibo and Tencent.

Wall Street expects Momo revenue to rise 122% this year and 37% next year, while earnings follow suit with 81% and 40% growth, respectively. The stock trades at 42 times trailing earnings -- which is slightly higher than the industry average of 36 for internet information providers -- but that premium is supported by its current growth rate.

My verdict: Momo thrives in the water

Recent volatility can be attributed to queasy investors taking profits instead of any insurmountable threats to its business model. Its growth is moderating, but that's mostly due to the law of large numbers. As long Momo keeps adding MAUs, introducing new features, and growing revenue at a faster rate than its expenses, its stock has room to run.

10 stocks we like better than Momo

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Momo wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Leo Sun owns shares of Tencent Holdings. The Motley Fool recommends Momo and Weibo. The Motley Fool has a disclosure policy .

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.

In This Story

TCEHY WB MOMO

Other Topics

Stocks

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More