Since its last earnings report in March, Momo (NASDAQ:MOMO) stock has soared over 60%. The company has found early success in transitioning from a dating app to a live video streaming platform. In the fourth quarter, net revenues increased 524% to $246 million, with live video service accounting for 79% of the top line. That's impressive for a company that didn't even offer a streaming service until Sept. 2015. And the company expects to continue making inroads with its new service in 2017. The company guided for revenue to come in as high as $243 million in the first quarter, a 377% increase from its small base last year.
Momo could crush expectations when it reports the latest results on May 23 before the market opens. However, revenue is not the only metric investors should be following. Here are other key developments investors should watch on Tuesday.
Paying users and gross margins
In the fourth quarter of 2016, Momo reported 3.5 million paying users of its live video service. The company is still well behind China's leading streaming provider, YY (NASDAQ:YY), which announced 5.9 million paying users in March. Although Momo is playing catch-up, it is the clear leader when it comes to monetizing the service. Gross margin has trended down for Momo over the last year, but it has remained well ahead of YY.
YY has already reported an additional quarter of results, margins did expand to just over 39%. Both companies' business models are based on revenue sharing with content providers. The numbers tell me that Momo is giving a smaller cut of revenue to video creators than its rival. If Momo can maintain its margins while closing the gap in regard to paying users, it will be a good sign that Momo has an attractive product. If margins decline significantly or users fail to grow at a meaningful level, then investors can assume that competitive pressures are catching up with the company.
The virtual gift that keeps on giving
Live video has been attractive for content creators. Streaming platforms have allowed internet sensations to earn significant income. Video distributors, in turn, earn money by either advertising third-party products and services or via virtual gifts given by fans. There has been some concern that virtual gifting is just a fad but given its rapid success and effect on the human psyche, the phenomenon may be here to stay.
Connie Chan of venture capital firm Andreessen Horowitz believes gifting allows fans to provide instant feedback. It has also become a flirting tool. Chan calls virtual gifting the digital version of "let me buy you a drink." She also notes that live streaming interactions are popular with those that are lonely, citing that the most active hours are between 10 p.m. and 4 a.m.
In fact, virtual gifting has been such a success for Momo that it is expanding the service beyond live video to services such as messaging. CEO Tan Yan elaborated on its growing popularity:
We introduced virtual gifting service in Nov. 2016 and have seen a positive momentum since launch. We believe in the future it will become a significant component in the [value-added service] category.
Momo reports premium membership services and offline virtual gifting in a category called value-added services. In 2016, the segment generated $67.6 million of revenue with 16% growth over the prior year. However, as a portion of overall revenue, virtual gifting decreased from 43% to just 12%. The fast growth of the live video service will likely drive this number down more, but investors should keep an eye on value-added services nonetheless. If its growth begins to accelerate, it would further signal that virtual gifting is here to stay.