Chinese app maker Momo (NASDAQ:MOMO) lost about a third of its market value over the past three months due to concerns about its growth, the rise or rival apps, and tighter regulations regarding social media platforms and streaming videos.
The stock remains up 65% for the year, and investors with big gains might be wondering if they should tough it out or take profits. But before we make a call on Momo's future, we should clear up five common misconceptions about the company.
1. It's not the "Chinese Tinder"
Momo's social media app is often called the "Chinese Tinder", because it's often used for dating. But the two apps aren't really analogous. Match Group's (NASDAQ:MTCH) Tinder is a free app, but paid users get unlimited likes, an undo feature called "Rewind", and a "Passport" feature to locate users while traveling. Subscription fees vary by age and location. It recently started selling ads, but most of its revenue still comes from subscription fees.
Momo doesn't use Tinder's "swipe left or right" feature. Instead, it lets users find other users to chat with based on their locations. However, most of Momo's revenue comes from a newer live video streaming platform which generated 83% of its sales last quarter. Viewers pay membership fees for certain broadcasters, or buy them "virtual gifts". Momo and those broadcasters then split those revenues. A smaller percentage of Momo's revenue comes from ads and internally developed mobile games.
2. Recent live video bans won't hurt Momo
Back in June, Chinese regulators ordered Weibo (NASDAQ:WB), Phoenix New Media's iFeng, and AcFun to stop streaming video and audio content. The government claimed that their streams weren't "in line with national audiovisual regulations" and propagated "negative speech," and said that the companies weren't properly licensed to broadcast news-related content.
Some investors thought that crackdown could torpedo Momo's growing live video business. However, those three companies were only singled out because they didn't obtain a newly introduced government-issued license last year. Both Momo and Tencent's (NASDAQOTH:TCEHY) WeChat had obtained that license, so they weren't ordered to halt their live streams.
3. But it's not immune to tighter censorship laws
Meanwhile, some Momo bulls believed that the government's approval of its videos meant that its streams wouldn't be censored. However, the government has cracked down on Momo before. Back in 2014, the state-backed media linked Momo to prostitution, and demanded that its users register their real names the following year. At the end of 2016, regulators ordered the shutdown of thousands of live streaming accounts.
Earlier this year, China's Ministry of Culture launched an inspection of top streaming video apps, including Momo, over allegations of promoting "vulgarity", "obscenity", and "wrong life values." The new broadcasting license, which Momo obtained last year, also requires the company to retain a backup of all streaming content for at least 60 days. This means that Momo's most popular accounts could still be abruptly shut down on a case-by-case basis.
4. Its user base isn't that big
Momo is often mentioned alongside tech giants like Weibo and Tencent, but its ecosystem is much smaller. Its monthly active users (MAUs) rose 22% annually to 91.3 million last quarter, and its paid members -- the main source of its revenues -- remained flat at just 4.1 million. The main reason that Momo's revenue rose 215% annually during the quarter was the fact that those paying users spent more money.
By comparison, Weibo's MAUs rose 28% annually to 361 million last quarter, while Tencent's WeChat MAUs rose 20% to 963 million. Considering that both platforms now offer live streaming videos, Momo's growth could peak as new users get pulled toward those larger platforms.
5. But the stock isn't expensive
Lastly, there's a common belief that Momo and many other Chinese tech stocks are "expensive". Yet Momo actually trades at just 24 times trailing earnings and 13 times forward earnings, which are remarkably low multiples for a company that's expected to post 135% sales growth and 91% earnings growth this year. Those growth rates should decelerate next year, but the stock could be a bargain if those figures stabilize.
So should you buy, hold, or sell Momo?
Momo is a very risky stock since nearly all of its growth depends on a small percentage of its active users spending a lot more money on their top broadcasters. It's similar to the business model of smaller mobile game makers, which rely on a handful of high-spending "whales" to generate enough cash to keep the lights on.
Meanwhile, the Chinese government could turn Momo's lights off at any time. If Momo can somehow add more paid members and keep regulators happy, it could continue expanding its ecosystem to challenge Weibo or Tencent. But that's a very speculative bet for now, and I'd rather take profits on Momo and stick with stronger Chinese tech players for now.