The tech sector is full of high growth stocks, but companies which double their annual revenue every one to two years are often micro-cap companies with unsustainable growth. Today, I'll discuss two companies which have market caps over $1 billion and could potentially double their annual revenue by 2018 -- Yirendai (NYSE:YRD) and Momo (NASDAQ:MOMO).
Yirendai is an online consumer finance marketplace in China which directly connects investors with borrowers while cutting banks out of the loop. That business model is similar to LendingClub's (NYSE:LC), but the Chinese peer-to-peer lending market has much higher growth projections than its U.S. counterpart.
Yirendai oversaw $682.9 million in loans last quarter, which represented 118% growth from the prior year quarter. Total revenues rose 140% to $110.4 million, and net income surged 226% to $39.2 million. Yirendai's revenue is expected to rise 120% this year and 66% next year, while its earnings are expected to grow 92% this year and 52% next year.
Yet Yirendai still trades at just 10 times forward earnings, due to several concerns about its core business. Henry Yin, managing director of Chinese lending platform CreditEase, claimed last October that investors lost $1.2 billion in the Chinese peer-to-peer lending market due to fraud. At least 700 similar peer-to-peer lenders in China also went bust last year. Yirendai ranks the quality of its borrowers from A to D, and a stunning 83% of those borrowers were grade D (roughly the equivalent of subprime borrowers in the U.S.) as of last quarter. However, its loan delinquency rates remain well under 1%.
Meanwhile, LendingClub posted widening losses as its CEO and CFO resigned amid a scandal of dodgy loan sales, which dealt a serious blow to the entire peer-to-peer lending industry. That blow, coupled with a general distrust of high-growth Chinese stocks, have kept Yirendai's fundamentals cheap despite its explosive growth potential.
Momo is another high-growth Chinese stock which U.S. investors often overlook. The company runs a mobile-based social network which lets people search for nearby users based on their personal profiles, and contact them via messages or video chat. While the platform isn't explicitly branded as a dating app, it's frequently referred to as the "Chinese Tinder."
Momo got off to a rocky start after it was founded five years ago. Chinese officials accused the app of facilitating prostitution in 2014, but it survived that scrutiny and went public in the U.S. later that year. Momo's revenue rose 222% annually last quarter to $99 million, and its non-GAAP net income surged 290% to $23.2 million. Analysts expect Momo to post 80% sales growth this year and 85% growth next year. Non-GAAP earnings are expected to rise 67% this year and 164% next year.
Based on those figures, Momo's forward P/E of 33 looks cheap. But just like Yirendai, Momo faces tough questions about its core business. First, the company's monthly active users (MAUs) actually fell 5% annually to 74.8 million last quarter, indicating that the company is simply squeezing more revenue out of its existing users with features like premium subscriptions, live video, mobile games, and mobile marketing. Therefore, Momo could eventually run out of new ways to boost revenue per user, and its sales would abruptly decline. The government could also revive its earlier accusations against the company.
Shares of Momo also went on a roller-coaster ride over the past year in anticipation of a private buyout offer from the company's co-founder and CEO Yan Tang, Matrix Partners, Sequoia Capital, Alibaba, and Yunfeng. However, Momo recently announced that the group had withdrawn its offer. Looking ahead, Momo faces tough competition from Tencent's WeChat, China's most popular messaging app, and social video platforms like YY.
High growth, high risks, high rewards?
Yirendai and Momo are both high risk plays which could deliver high rewards in the near future. But investing in both stocks requires faith in the Chinese economy, a willingness to weather some blows from the regulators, and a stomach for volatile stock prices. Otherwise, you should probably stick with more established Chinese tech companies like Baidu instead.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.