In late April, Momo (MOMO -2.08%) announced that Chinese regulators ordered the removal of its dating app Tantan from the country's app stores. Momo stated that it was working with authorities to bring it back "as soon as possible," but didn't reveal specific reasons for the suspension.
At the time, Jefferies analysts noted that Tantan only generated about 10% of Momo's sales, that the suspension didn't impact Tantan's existing users, and that prior regulatory suspensions typically lasted less than a month. However, I warned investors to avoid Momo's stock until Tantan returned, and that regulators might probe its namesake app.
Unfortunately, that's what happened on May 10, when Momo announced that the suspension of news feed posts on both Momo and Tantan from May 11 to June 11. However, Momo will remain available on Chinese app stores.
Momo stated that it will focus on "strengthening its content screening efforts," and that it was "evaluating the impact of the temporary suspension and other self-inspection measures on its overall business operations." In other words, Momo doesn't know when the suspensions will end, and it isn't sure how badly they'll impact its growth.
Both wings clipped... now what?
Momo and Tantan are often called the "Tinders of China", since both apps are often used for online dating. Momo started out as a social network that let users find each other based on their personal profiles and locations.
Momo introduced a live video streaming feature in 2017 that let users buy virtual gifts for their favorite broadcasters. That business became Momo's core growth engine, generating 80% of its revenue in 2018, and convinced it to phase out its weaker advertising and mobile gaming businesses.
Last year Momo acquired Tantan, a Chinese clone of Match's (MTCH) Tinder, for nearly $800 million. Last quarter, Momo's number of paid users on both platforms (for live video and value-added services, without double-counting users) rose 67% annually to 13 million. Tantan accounted for 3.9 million of those paid users.
Momo generated a streak of triple-digit sales growth after the launch of its live video platform, but that growth had decelerated significantly by 2018.
Momo's growth seemed to stabilize in the second half of the year, but that can mostly be attributed to its takeover of Tantan. Last quarter Momo estimated that its sales would rise just 28%-32% annually and decline 5%-8% sequentially due to the seasonal softness of its value-added services during Chinese New Year.
The recent suspensions shouldn't impact Momo's numbers for the first quarter, which ended on March 31. However, its first-quarter report on May 28 could include ugly or opaque guidance for the second quarter.
Why regulators are crippling Momo
Momo weathered a similar crisis five years ago when the state-run media claimed that its app was being used for prostitution. The Nanchang Evening News also recently claimed that ads for prostitution were popping up in Tantan's news feed.
China's regulators didn't cite prostitution in its crackdown on Momo, but stated that it should purge "illegal content" from its platforms. Alibaba's (BABA -0.75%) enterprise messaging app DingTalk was also recently ordered to halt access to its DingTalk community, a forum where users share their experiences with the app, for a month.
These suspensions are part of a broader crackdown on social media and video sharing apps in China, which ramped up significantly last year to censor criticism of the government, support for "separatist" movements (like Tibet and Taiwan), satires of Chinese culture, and anything else that regulators deemed "negative and harmful."
Should Momo investors worry?
Momo and Tantan aren't being pulled from existing users' phones, but users are now cut off from each other without news feed posts. Users can still message each other, but it's now much harder to find new users or view their updates.
The good news is that regulators aren't completely banning Momo's apps, and the suspensions should end by mid-June. However, users could abandon the app in the meantime, and other dating apps -- like Qingchifan ("Let's Eat") or Xintiao ("Heartbeat") -- could benefit. Therefore investors should avoid Momo until these suspensions are lifted or it offers a clearer view of their financial impacts.