Momo (MOMO +2.71%) isn't a familiar name to many U.S. investors, but the Chinese social media stock has rallied about 270% over the past 12 months. Momo's namesake app, often called "China's Tinder," helped it generate triple-digit sales and earnings growth in recent quarters.
But even after that run, Momo still trades at surprisingly reasonable valuations. So, why aren't more U.S. investors following this growth play on China's red-hot internet market?
Momo's mobile app. Source: Google Play.
Why Momo is often overlooked
The simplest explanation is that Momo is often overshadowed by the bigger names of Chinese tech, namely the "BAT" triumvirate of Baidu, Alibaba (BABA +6.94%), and Tencent (TCEHY +0.76%). Many U.S. investors stick with these three established players since they're considered the safest plays in a volatile sector.
There's also a general distrust of smaller Chinese companies thanks to dozens of shady companies being delisted over allegations of fraud. But if we take a closer look at Momo, we'll see that it's a well-established company in a lucrative niche.
Why Momo deserves more attention
Momo's app lets users find friends via profiles and location data. It also runs a live streaming video platform in which viewers can buy virtual gifts for their favorite broadcasters. That revenue is split between Momo and the broadcasters.
Momo's monthly active users (MAUs) rose 18% annually to 85.2 million last quarter. Paying live video users rose 17% sequentially to 4.1 million. That user growth boosted its revenue by 421% annually to $265.2 million, while its GAAP net income surged eleven-fold to $81.2 million. On a non-GAAP basis, Momo's net income rose 615% to $90.7 million.
Analysts expect Momo's revenue and non-GAAP earnings to respectively grow 122% and 81% this year. For 2018, its revenue is expected to rise 37%, while its earnings could grow 40%.
Despite those rosy growth forecasts, Momo trades at just 34 times earnings, which merely matches the industry average for internet information providers. Its forward P/E of 24 looks even cheaper.
Evaluating the main headwinds
But looking ahead, larger companies could still marginalize Momo with their own live streaming platforms. Tencent already added live streaming features to WeChat, the most popular messaging app in China with 938 million MAUs.
Microblogging site Weibo (WB +1.07%), which serves 340 million MAUs, also offers live video broadcasts across its network. Smaller live video players like YY could lure away Momo's broadcasters.
Weibo's mobile app. Source: Google Play.
However, research firm iResearch estimates that the Chinese live video streaming market grew 180% into 20.8 billion yuan (about $3 billion) last year -- so these platforms can probably co-exist without marginalizing the others.
Nonetheless, Chinese regulators -- which have repeatedly expressed their distaste for live streaming platforms -- could accelerate their ongoing crackdown on the platforms, which they claim "harm social morality." After shuttering accounts on an individual basis for over a year, regulators recently forced Weibo, Phoenix New Media's Feng, and AcFun to halt all live streams until they obtained government licenses -- which had been required since last September (but not actively enforced).
Momo, Tencent, and other companies were spared because they already obtained the license, but regulators can still ban their accounts on a case-by-case basis.
Is a buyout in the cards?
Rapidly growing niche players often get bought out, and Momo is frequently mentioned as a takeover target. Back in 2015, Momo CEO Yan Tang and a group of investors -- which already owned 47% of the company -- tried to buy all the remaining shares.
Last April, Alibaba (which is also Weibo's second biggest investor) joined Tang's buyout group. That fueled speculation that Momo would finally be acquired, but Tang eventually abandoned the buyout plan and Alibaba unloaded its stake over the following year.
That buyout plan fizzled out, but Momo's high growth, reasonable valuations, and clean balance sheet still make it a lucrative buyout target for rivals like Weibo and Tencent.
The key takeaways
Momo isn't a stock for queasy investors. Its price swings are volatile, while competition from bigger platforms and unpredictable regulation could throttle its growth. But for investors looking for a higher risk, higher reward play in China than the typical BAT stocks, Momo might just fit the bill.
