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Can Momo Stock Bounce Back After Last Week's 30% Drop?

By Rick Munarriz - Dec 4, 2017 at 10:07AM

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China's social video speedster takes a hit after weak guidance, stagnant premium user growth, and an analyst's bearish update.

It was a rough week for Momo (MOMO -10.75%) investors. Shares of the company behind the fast-growing social entertainment platform plummeted 29.8%, making it the third biggest loser among Nasdaq-listed stocks. 

Momo posted monster growth in its third quarter, but its guidance left plenty to be desired. A few analysts rushed to the falling stock's defense, but at least one Wall Street pro responded to the problematic outlook by slashing his price target on the shares. Momo has now fallen the day after posting quarterly results in four of the past five quarters, with double-digit percentage slides in back-to-back periods. 

The reception desk at Momo's office.

Image source: Momo.

A moving picture is worth a thousand verbs

The third quarter itself was solid, blowing through analyst expectations on both ends of the income statement. Revenue skyrocketed 126% to $354.5 million, ahead of both the 115% to 118% growth that it was targeting three months ago and the $339.3 million that Wall Street was targeting. Momo's profit of $0.45 a share landed considerably ahead of the $0.38 a share that analysts were modeling, but double-digit percentage beats in earnings has become old hat for the Chinese speedster in recent reports.

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%
Q3 2017 $0.38 $0.45 18%

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

Stocks that trounce Wall Street prognostications typically move higher, but Momo's guidance and flat sequential growth in premium users scared away more investors than those wooed by another blowout financial performance. With top-line growth decelerating sharply and margins contracting the future isn't as rosy as the past. 

Momo's outlook for the current quarter calls for 50% to 56% in year-over-year growth. It has grown its active user base to 94.4 million, but it has closed out the past three quarters with just 4.1 million paying members for the live video platform that's generating 85% of its revenue. Some analysts would go on to adjust their 2018 models lower, as Wall Street now sees revenue and earnings per share rising 31% and 29% next year, respectively. 

Momo was one of this year's hottest stocks when it peaked in mid-August with a 154% year-to-date gain. It has surrendered most of those upticks in the past four months, and it's now trading 23% higher in 2017. Some analysts stood by the stock last week, arguing that the sell-off was overdone. Deutsche Bank and Jefferies put out supportive notes pointing out the stock's compelling valuation, and CLSA actually upgraded the shares following the sell-off. Momo is now trading for a little more than 10 times next year's earnings, a bargain if Momo can keep growing at a double-digit percentage clip in the future. 

Alex Yao at JPMorgan isn't as convinced. He's lowering his price target from $43 to $30, sticking to his neutral rating. He sees risks in the year ahead, fearing that Momo's weaker-than-expected guidance for the fourth quarter will spill over into 2018. Momo's beefing up its live video platform by teaming up with guilds and agencies to draw magnetic live broadcasting performers, but that will also boost its content costs. 

Last week's sell-off was rough, and earnings growth is likely to fall short of the already decelerating top-line gains in the year ahead. Investors tend to steer clear of an online platform when trends are starting to turn, but the fact that Momo is still growing briskly and the stock's dirt cheap valuation make it a compelling buy for risk-tolerant investors at current levels. 

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