Momo: A Growing Company With a Price Dip

Momo, China's fourth-largest social platform, has fallen in recent months, but could provide excellent returns in the year to come.

Lucas Hahn
    Jan 04, 2018 7:05 AM  PT
Momo: A Growing Company With a Price Dip
author: Lucas Hahn   

Chinese tech stocks rose sharply last year, and many investors might think they have missed the boat. However, smaller players in China's rapidly growing digital economy still offer some upside, including Momo Inc. (Nasdaq: MOMO).

Momo, which describes itself as a "location-based social platform," dominates China's fast-growing livestreaming market, and also derives revenue from mobile games, mobile marketing, and value-added services (including member subscriptions and virtual gifts).

In the third quarter of 2017, Momo boasted 94.4 million monthly active users. This makes it the fourth most-popular social app in China, behind WeChat and QQ, both owned by Tencent Holdings Ltd. (OTCMKTS: TCEHY), and Weibo Corp. (Nasdaq: WB).

Founded in 2011, Momo's growth over the past few years has been nothing short of meteoric. Despite this, the stock trades at around 17 times earnings.

Investors try to find stocks that offer growth at a reasonable price. Buying Momo stock means an investor can purchase a fast-growing company at a low price. Let's take a closer look at Momo, and why the stock, which changes hands for around $25 a share, is attractive.

Momo's Strengths

Over the past few years, Momo has grown revenue, net income, and active users at an impressive rate.

Momo's revenue soared from just $3.1 million in 2013 to $1.18 billion during the past twelve months. In the third quarter of 2017, Momo's revenue jumped 126 percent compared with the previous year to $345.5 million.

Momo turned profitable in 2015, generating $13.4 million in earnings that year. In the latest 12 months, Momo reported earnings of $304.9 million thanks in part to a 22-percent increase in the number of its users, from 77.4 million in the third quarter of 2016 to 94.4 million in the same 2017 period.

An Analyst Favorite

Analysts think highly of Momo stock. According to the website Tipranks, two Wall Street analysts have a median $46.50 price target. Although well above its current price, that would only return the stock just above its trading value back last summer.

Indeed, Momo stock lagged its peers in 2017. Weibo stock was up 150 percent and YY Inc. (ADR) (Nasdaq: YY), a rival livestreaming app, rose more than 180 percent last year. Momo stock was up only 33 percent overall, and it remains well off its 52-week high of $46.69, which it reached on August 8.

Much of the discounting came after successive earnings reports for the second and third quarters disappointed. Although Momo's growth was impressive, investors worried about a slowdown in revenue growth. Annual revenue growth of 126 percent in the third quarter, for example, was slower than the 215 percent Momo reported in the second quarter of this year.

But while the rate of revenue growth might be cooling, Momo continues to add users at a rapid rate. Daily active users grew at a faster rate over the trailing 12 months than they did in the 12 months ended Sept. 30 last year. This will pay off, since chat apps like Momo benefit from a larger network.

Momo's user growth over the past six quarters. 

Given the company's slide in price since then, does Momo's current stock price reflect its growth potential?

According to the website Finviz, Momo trades at about 17 times earnings, far below the price/earnings multiple for Weibo of 88. And many consider the stock attractively undervalued.  The company is a fast-growing stock with no debt and plenty of cash, valued at under $5 billion.

This could also make the company a potential takeover target. A group led by Momo's CEO tried to buy the company in June 2015. Alibaba expressed interest in April 2016, but later sold most of its shares.

The fact is that Momo is a young company, touting in its annual report that it was still in the "early stages of monetization." If true, Momo stock could provide excellent returns in the coming years.