It will soon be time for one of this year's hottest stocks to earn its heady gains. Momo (NASDAQ:MOMO) announces financial results on Tuesday morning, and there's a lot riding on the stock that may have given back half of this year's advance but is still trading 75% higher in 2017.

The company behind China's fast-growing social entertainment platform bellyflopped last time out. Momo stock plummeted 20% the day it posted its second-quarter report, and it's easy to get nervous if you're long the shares. The stock has fallen on earnings day in three of the past four quarters, though it has managed to overcome its post-quarterly swoons with aplomb. At its peak in mid-August -- just before its most recent earnings face-plant -- the stock was trading 154% higher year to date. 

Momo receptionist desk at headquarters.

Image source: Momo.

Beat and graze

Expectations are high for Tuesday's financial update. Analysts see revenue soaring 116% to hit $339.3 million, a big step up but it would actually be its weakest top-line growth since the first quarter of 2016. Revenue more than tripled in each of the five previous quarters. Momo's push to add live video broadcasts to its social platform has been a game changer. Wall Street's holding out for a profit per share of $0.38, up sharply from $0.24 a year earlier.  

The irony in the stock's earnings day stumbles is that Momo has consistently posted blowout results. Analyst profit targets may seem lofty, but Momo has blown through them with ease over the past five quarters of heady growth.

Quarter EPS Estimate EPS Surprise
Q2 2016 $0.08 $0.12 50%
Q3 2016 $0.14 $0.24 71%
Q4 2016 $0.30 $0.44 47%
Q1 2017 $0.32 $0.44 38%
Q2 2017 $0.31 $0.35 13%

Data source: Yahoo! Finance. EPS = earnings per share.

The size of the beat has decelerated in each of the past three quarters. Have analysts finally started to figure Momo out or has the easy money been made during its initial spike in popularity? The answer will come just before Tuesday's market open, and the only certainty here is that the stock is likely to move sharply one way or the other on the news. 

The two concerns coming out of Momo's second-quarter report were the sequential stagnancy in paying members and the lukewarm guidance it provided for now concluded third quarter. Momo had 4.1 million premium users at the end of the second quarter, just where it was three months earlier. Another flat sequential showing could prove challenging for the stock, and things would be downright brutal if we were treated to a decline. 

Momo's guidance in August was calling for $337 million to $342 million in revenue for the third quarter, up 115% to 118% since the prior year's showing but a modest 8% to 10% advance from the second quarter's $312.2 million showing. Momo's sequential top-line gain between the second and third quarters of last year was a more robust 59%. The dot-com speedster doesn't offer up bottom-line guidance.  

Things don't have to go badly on Tuesday. Momo stock is surprisingly cheap relative to many of China's high-flying internet stocks. The shares are trading for a reasonable 19 times this year's projected profit and a mere 14 times next year's bottom-line target. The fickle nature of social platforms and fears of Chinese regulators clamping down on cyberspace access may keep the valuation in check, but the valuation is awfully compelling as long as Momo lives up to its end of the growth bargain in a few days.

 

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Momo. The Motley Fool has a disclosure policy.