Please ensure Javascript is enabled for purposes of website accessibility

Momo Stock Starting a Year Hot Has Burned Investors Before

By Rick Munarriz – Updated Apr 15, 2019 at 9:55AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

China's fast-growing operator of a live-video social platform is hot again, but we didn't see big gains during the first half of the year stick around in the second half last year.

Shares of Momo (MOMO -7.98%) are popular again. The Chinese social video specialist has seen its stock climb better than 26% in 2019, making this the third year in a row that Momo has gotten a new calendar year off to a strong start. 

Holding on to its initial gains has been a problem for the volatile growth stock. Momo is coming off of back-to-back years of monster rallies through the first six months of the year, only to subject investors to brutal sell-offs during the final six months of the year. 

  • 2017 first half: up 139%
  • 2017 second half: down 44%
  • 2018 first half: up 78%
  • 2018 second half: down 45% 
Momo reception desk at company headquarters.

Image source: Momo.

Momentum cuts both ways

Soaring through the first half of the year only to shed nearly half of its value is a dramatic reversal, but it's hard to call this a trend with such a small sample size. There isn't a lot of seasonality to the business. Top-line results have grown sequentially every single quarter since Momo began generating revenue in 2013.

Momo also hasn't shown a knack for falling short of expectations during the latter half of the calendar year. It has consistently beaten Wall Street profit targets during the past two years, even if the pace of the surprises has slowed during the latter half of the reporting year.

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%
Q3 2018 $0.52 $0.53 2%

Data source: Yahoo! Finance.

It's not just the pace of the earnings beats that has slowed. Revenue has decelerated in six of the past seven quarters, including last time out with its 51% top-line spurt. Momo remains a force.

Check out the latest Momo earnings call transcript. 

The popularity of Momo continues to grow. It's at a healthy 110.5 million monthly active users, and the number of paying users on the live-video service is up 12.5 million. It's easy to see why the market's warmed up to a hot stock with a percolating social dating platform in the world's most populous nation. It's also easier to explain away the retreat during the second half of 2017 as a natural correction. The slide during the latter half of last year is easier to justify since Chinese stocks in general were getting slammed as trade tensions bubbled up and economic fears heightened. 

Momo is cheap relative to its growth rate, fetching just 15 times trailing earnings and a mere 11 times Wall Street's profit target for 2019. These are attractive multiples given where Momo is in its growth cycle, but that hasn't spared the shares from correcting after big gains in the past. Holding on to these gains now -- and more importantly, building on them during the second half of this year -- will go a long way to redeeming Momo as a year-round investment. 

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

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.