4 Reasons I’m Thinking of Buying Momo Stock

Shares of Momo (NASDAQ: MOMO) surged 27% last week, after the Chinese company’s first-quarter numbers crushed analyst estimates. Revenue rose 64% annually to $435 million, beating estimates by nearly $39 million. Its non-GAAP net earnings jumped 57% to $0.69 per ADS — topping expectations by $0.19. Momo also offered a rosy forecast for 51% to 55% sales growth for the second quarter.

I’ve been wary of Momo in the past, since its sales growth was cooling off from triple-digit levels; its live video streaming unit seemed vulnerable to rivals like YY; and it seemed prone to censorship. But in being cautious, I missed out on the stock’s 80% year-to-date rally.

Image source: Getty Images.

Today, I’ll take a fresh look at Momo’s growth metrics and discuss four reasons I think Momo might be a great growth play at today’s prices.

1. Growth in active and paid users

Momo’s core app allows users to find each other via their profiles and shared locations. It’s often called “China’s Tinder” due to its widespread use as a dating app. However, Momo’s introduction of a live video streaming platform, supported by revenue from ads and virtual gifts, was a game-changer after its introduction in early 2017.

Momo’s monthly active users (MAUs) rose 21% annually to 103.3 million during the first quarter, compared to 22% growth in the fourth quarter. Paying users across its live video platform, who purchase virtual gifts and other value-added services, rose 7% annually and 2% sequentially to 4.4 million. Its total paying users, which includes its live video platform and other value-added services, rose 16% annually to 8.1 million.

Momo’s paid user base still represents a small percentage of its MAUs, but it’s growing at a steady rate.

2. TanTan and Momo’s value-added services

In May, Momo closed its acquisition of rival dating app TanTan, also often dubbed “China’s Tinder”, in a deal worth almost $800 million. Unlike Momo’s app, TanTan is clearly a Tinder clone with the same left and right-swiping mechanics as its western counterpart. In fact, TanTan started paying Match royalties earlier this year after the it sued the start-up.

TanTan’s mobile app. Image source: Google Play.

TanTan has about 20 million MAUs, and it recently started monetizing its platform with value-added features like unlimited swipes. By absorbing TanTan, Momo can grow its MAUs while boosting its value-added services revenues to complement the growth of its live video revenue.

Last quarter, Momo’s live video revenue jumped 75% annually to $371.5 million, compared to 68% growth in the fourth quarter. Its value-added services climbed 62% to $37 million, compared to 54% growth in the fourth quarter.

But looking ahead, the integration of TanTan — which wasn’t included in Momo’s first-quarter results — should significantly boost its value-added services revenue over the next few quarters.

3. An expanding ecosystem

Momo is also expanding its ecosystem with new features — including group video chats, live audio chats, a karaoke feature, and integrations into its Werewolf audio-video social game.

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

At the end of 2017, it launched a new recommendation engine aimed at boosting social interactions across its platform.

Momo claims the AI-powered algorithm lifted total interactions by 20% sequentially during the fourth quarter and another 30% during the first quarter. That increased “stickiness” should keep Momo’s users locked in.

During the conference call, Momo CEO Tang Yan also stated that the average user time spent on the app “showed a slight uptick” from the fourth quarter and rose 16% on a year-over-year basis.

4. It’s ridiculously undervalued

Wall Street expects Momo’s revenue and non-GAAP earnings to rise 38% and 30%, respectively, this year. Most of those estimates probably haven’t been revised to include the acquisition of TanTan yet.

But at $45, Momo trades at less than 20x this year’s earnings and 16x next year’s figures. Those valuations seem cheap relative to those growth metrics. By comparison, Match trades at about 30x this year’s earnings, while the S&P 500 has a forward P/E of 17x.

I’m not pulling the trigger on Momo yet, since fears about escalating trade tensions between the U.S. and China could knock this stock down a few points. However, I’m keeping a close eye on Momo in 2018.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Match Group and Momo. The Motley Fool has a disclosure policy.

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