One of China's more volatile yet possibly cheapest internet growth stocks is Momo (NASDAQ:MOMO). The live video social networking and online dating specialist reports financial results on Thursday morning, one of the last stocks operating on the calendar year that will be stepping up this earnings season.

Momo is growing quickly and blowing the cover off the ball when it comes to earnings expectations. Its business model would also seem to be less prone to the trade tariff concerns than most of the Chinese growth stocks that have also been dogged by investors in recent months. Momo stock trades at a steep discount to its recent growth rate, fetching just 16 times trailing earnings, 13 times this year's projected profitability, and 10.6 times next year's analyst target. The stage is set for Momo to prove this week that it deserves a richer valuation. 

The reception desk area at Momo headquarters.

Image source: Mono.

Missed connections

Momo's guidance back in August was calling for $525 million to $540 million in revenue for the third quarter. Currency fluctuations may weigh on how that translates in Thursday morning's report, but just remember that Momo is looking for 51% to 55% in year-over-year top-line growth in its own currency.

On the other end of the income statement, Momo doesn't offer up a profit outlook. However, analysts see earnings per share rising to $0.54 from $0.45 a year earlier. Wall Street pros have been paring back their net income expectations in recent months, suggesting either general skittishness when it comes to online trends in China, or that the acquisition of Chinese dating app Tantan earlier this year will squeeze margins. 

The silver lining, here, is that Momo has routinely landed ahead of Wall Street's bottom-line estimates. The stock has nearly doubled since the start of last year, and a big reason for the market-thumping return is that analysts haven't come close to its income results.

Quarter EPS (Estimate) EPS (Actual) Surprise
Q1 2017 $0.32 $0.44 38%
Q2 2017 $0.31 $0.35 13%
Q3 2017 $0.38 $0.45 18%
Q4 2017 $0.46 $0.53 15%
Q1 2018 $0.50 $0.69 38%
Q2 2018 $0.61 $0.66 8%

Data source: Yahoo! Finance.

Momo's growth has been largely a result of its live video service, accounting for 83% of the revenue generated in the second quarter. Getting freeloaders to become paying customers is the secret sauce that drives social video and online dating. Investors will naturally want to get a read on how usage trends are faring. Monthly active users clocked in at 108 million in June, up from the 91.3 million on its platform a year earlier. Just 11.6 million of them are paying for premium features or springing for virtual gifts, but hearty growth there is why revenue is rising a lot faster than the count of monthly active users. 

Investors are nervous, and the stock has shed 39% of its value since peaking in June. This is the second year in a row that the stock has fallen in the second half of the year after soaring through the first six months. The pessimism is thick, but that's also the kind of dense fog that another blowout quarter can cut through in a hurry. Your move, Momo.

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