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Momo Shows That 51% Growth Sometimes Isn't Enough

By Rick Munarriz – Dec 7, 2018 at 9:30AM

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China's social-video speedster takes a hit after landing at the low end of its guidance. The fourth quarter doesn't look any more promising.

Every good winning streak comes to an end. Momo (MOMO 0.22%) stock moved 15% lower on Thursday after posting mixed third-quarter results, hitting its lowest level in nearly 11 months. Shares of the Chinese social-video and online-dating specialist had moved at least 9% higher following each of its three previous financial reports. 

Net revenue rose 51% to hit $536 million for the quarter. This showing is technically at the low end of the 51% to 55% growth that it was targeting three months ago. It's also fair to say that investors were spoiled, holding out for more. Momo also was coincidentally forecasting 51% to 55% top-line growth for its second quarter six months earlier, only to bust through a 58% surge in revenue. 

Momo app on a smartphone.

Image source: Momo.

Love at first fright

Momo continues to gain in popularity. There were 110.5 million monthly active users on the app by the end of the third quarter, up from an audience of 94.4 million a year earlier and 108 million just three months earlier. Improving monetization and greater success in getting users to spring for premium offerings explain why revenue is outpacing user growth. 

The number of total paying users on Momo's live video service has risen from 7.3 million to 12.5 million over the past year, though a good chunk of that -- 3.6 million -- came from the Tantan social dating app it acquired earlier this year. The live-video platform continues to be the top contributor, at 76% of the revenue mix, though the segment is growing slower than Momo's overall business. Value-added services -- Momo's second segment that consists mostly of virtual gifts that members buy for other users -- more than tripled during the period. 

The path down the income statement wasn't as kind as it was last time out when Momo blew expectations away by nearly doubling its profitability. Momo's adjusted earnings this time around rose just 22% to $114.3 million, or $0.53 a share. A 66% surge in costs and expenses held back its bottom-line growth. This is the first time in nearly two years that Momo failed to exceed Wall Street's profit targets. 

Guidance is another pressure point here. Momo is eyeing revenue growth slowing to a 43% to 47% clip during the final quarter of 2018. Landing at the top end of its range still would be its weakest year over year result in its four-year history as a publicly traded company. Landing smack dab at the low end of its third-quarter guidance also will keep enthusiasm in check this time around.

Investors obviously weren't happy with Momo's performance, sending the stock to its lowest level since mid-January. It's not love at first sight, and first impressions are often all you have when it comes to online dating. 

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

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