One of this year's biggest winners was one of Tuesday's biggest losers after posting poorly received financial results. Shares of Momo (NASDAQ:MOMO) declined 20% on the day, but the stock is still trading 96% higher for all of 2017.
It was another period of heady growth for the Chinese video-centric social networking speedster. Revenue soared 215% to $312.2 million, fueled once again by the scintillating growth of its live video platform. Adjusted earnings roughly tripled to $73.8 million or $0.35 a share.
Momo stock took a hit despite blowing through its earlier top-line guidance. In May, the dot-com darling was eyeing $283 million to $288 million in revenue, or growth of 186% to 191%. Momo doesn't provide earnings guidance.
Reality comes with buffering breaks
"You don't more than double year to date without some heavy expectations going into any financial update," I wrote over the weekend, assessing Momo's upcoming earnings report. "Bears will bet on a correction. Bulls will hope that another blowout report will awaken the stock after its slumber in recent months."
Bulls got their blowout, but it wasn't enough and the bears got their correction. Weak guidance is often the culprit of a sell-off following a seemingly strong report, but Momo's outlook for the current quarter promises healthy near-term growth.
Momo sees $337 million to $342 million in revenue for the current quarter, modest sequential improvement and a year-over-year spike of 115% to 118%. Growth is clearly decelerating. We've gone from a 421% top-line burst in the first quarter to a 215% surge in the second quarter, followed now by guidance of 115% to 118% for the third quarter. Deceleration is normal with hyper-growth companies, especially as its live video ecosystem gets fleshed out.
Live video now accounts for 83% of Momo's revenue, but it's also there where you find the most likely scapegoat for the sell-off. Momo closed out the second quarter with 91.3 monthly active users, well ahead of the 74.8 million on its platform a year earlier and the 85.2 million monthly active users it was serving in the first quarter. However, it had just 4.1 million paying users in its latest quarter, sequentially flat with its premium-paying base during the first quarter. A healthy increase in average revenue per user -- with revenue growing a lot faster than its monthly active user base -- tends to get lost when a lower percentage of the users are paying for access.
The market may have overlooked the lack of sequential growth in premium users against a flurry of big gains elsewhere if the stock was trading in the shadows, but Momo -- with its shares having more than doubled in 2017 ahead of Tuesday morning's release -- came in baked with lofty expectations.
The strong growth on both ends of its income statement and the 20% sell-off naturally combine to create a kinder valuation. Momo now trades for less than 25 times adjusted trailing earnings with a price-to-sales multiple south of eight. Investors may be understandably hurt by how Tuesday's trading played out, but the stock remains one of this year's biggest gainers.