Shares of Momo (NASDAQ:MOMO) recently tumbled after Chinese regulators ordered the removal of its Tantan dating app from several mobile app stores. Momo stated that it was "proactively communicating with the relevant government authorities" and will "fully cooperate" to restore the app's availability "as soon as possible."
Momo stated that it would conduct a "comprehensive internal review" of Tantan's content, but warned that the sudden suspension would impact its ability to attract new users. However, the app remains online for Tantan's existing users.
An unexpected setback for Momo
Momo acquired Tantan for nearly $800 million last May. Momo and Tantan are often called the "Tinders of China", since they're both widely used as dating apps.
Momo started out as a social network that allowed users to find each other based on their personal profiles, interests, and locations. However, its growth accelerated significantly in 2017 after it launched a live video streaming feature that was monetized with virtual gifts for broadcasters. Momo also recently launched a premium subscription service that features AI-powered matches, higher search exposure, and other tools.
Tantan is a direct clone of Match Group's (NASDAQ:MTCH) Tinder. Match previously sued Tantan over the similarities, and Tantan agreed to pay Match royalties to settle the case. Tantan's paid subscriptions give users unlimited profile views, swipes, and matches.
Momo bought Tantan as its growth in users and revenue decelerated. Last quarter, Momo's total number of paid users (for its live video and value-added services, without double-counting overlapping users) rose 67% annually to 13 million. Without Tantan's addition of 3.9 million paid users, that figure would have only risen 17%.
Momo disclosed that its namesake app's total monthly active users (MAUs) rose 14% annually to 113.3 million, but didn't disclose how many MAUs Tantan had. Tantan reportedly had 20 million MAUs at the time of its acquisition, so it could still have a much higher ratio of paying users than Momo.
During last quarter's conference call, investor relations chief Cathy Peng stated that although Momo and Tantan were the "dominant" players in the online dating market, the apps still reached "less than one half of the total addressable market" in China.
Peng also stated that Momo's goal was to make Tantan "a new engine for the company" within the next two to three years. The abrupt removal of Tantan from app stores could derail those rosy plans.
Gauging the financial impact
Momo doesn't disclose Tantan's revenues separately, but Jefferies estimates that Tantan accounts for about 10% of its top line.
Jefferies stated that the temporary suspension shouldn't impact Momo's growth since existing users aren't affected and the suspensions generally last less than a month. Many other major apps recently struggled with temporary suspensions as part of the government's ongoing crackdown on "vulgar" content, so Tantan's suspension isn't surprising.
However, investors should note that this isn't Momo's first clash with critics. Five years ago, China's state-run media repeatedly slammed Momo for its use as a prostitution app. Tantan now faces similar claims, with the Nanchang Evening News claiming that its platform displays ads for prostitution.
Prostitution is officially illegal in China, which raises troubling questions about Momo and Tantan's business models. Other apps, like news aggregators or video streaming services, can police their own content with algorithms, but Momo and Tantan can't accurately track their users' offline activities. Tinder faced similar accusations before, but regulators generally turned a blind eye in most markets.
This dip isn't a buying opportunity
I've repeatedly stated that Momo is an undervalued growth stock. It's expected to post 20% earnings growth this year, yet trades at just 10 times forward earnings.
However, I wouldn't touch this stock until Tantan returns to China's app stores. This would indicate that the suspension wasn't part of a broader crackdown on dating apps and that Momo isn't next on the government's hit list. If Tantan stays suspended or regulators crack down on Momo, this company could be in serious trouble.