Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
One month ago -- to the day -- shares of Momo (MOMO 1.33%) suffered a near-10% plunge after the Chinese online dating app company warned investors that "certain mobile app stores in China have removed the Tantan mobile app on direction of governmental authorities in China."
About two weeks later, Momo's slide worsened when the company elaborated that "pursuant to directives of relevant government authority," it was "temporarily suspend[ing] the ability of users to post social newsfeeds on its platform between May 11, 2019 and June 11, 2019."
By the time trading closed last week, Momo shares had lost nearly 30% of their value. But then, a miracle happened.
Yesterday, Momo released its Q1 2019 financial results, and the news was very good indeed. Sales increased 35% year over year and profits were much better than expected at $0.62 per share (albeit pro forma).
In conjunction with the regulatory pressures Momo had warned us about, the company noted that revenues in both its "mobile marketing" and "mobile games" divisions declined (down 32% and 8%, respectively). However, "live video" revenue and sales of "value-added services" -- both much more important revenue drivers for Momo -- increased 14% and 285%, respectively.
So not such a bad quarter, after all.
(I'd also point out that although earnings beat estimates, they did decline year over year. On the other hand, free cash flow surged more than 47%, as operating cash flow grew despite the regulatory pressures, while capital spending actually declined.)
How Wall Street read the report
Most of Wall Street took this news in studied silence, with no analysts reacting overtly to Momo's earnings beat yesterday, even as investors in general bid the stock up. But this morning, Citigroup stepped forth and issued an upgrade.
Upgrading Momo stock to buy and setting a $40 price target, Citi opined in a note covered by StreetInsider.com (subscription required) that the regulatory risks facing Momo now appear to be priced in. Furthermore, the company's "fundamentals" look to be "on track." And given the continued sales growth -- especially in its largest revenue streams -- this seems fair to say.
What Momo had to say about regulatory risk
At the same time, it's curious to note that Momo itself had very little to say about the state of its conversations with the Chinese government, the removal of apps from app stores, the suspension of user posts to social media -- about anything, really, that caused its stock to plummet earlier this month.
Rather, Momo's CEO limited himself to commenting in the earnings release that it had a "solid quarter" and "good results," and that the company planned to continue "to execute against the strategic priorities and create value for our shareholders."
Basic corporate boilerplate, signifying nothing.
What it means to investors
So what are investors to make of that? If you ask me, Momo executives appeared to be stepping carefully to avoid saying anything that might offend its regulatory masters in China. Still, management did let slip that things might not be looking as bad for its business as the 30% decline in share price might have implied.
Heading into earnings, you see, Wall Street analysts had braced themselves for the worst, posting sales growth estimates of just 17% for Q2 2019 as they waited for Momo to update its guidance. In fact, when that guidance came, management predicted sales growth of 27% to 30%.
In short, from the perspective of the people who know the company best, it kind of looks like investors overreacted this month -- and with Momo shares now selling for just 17 times earnings (and only 11 times free cash flow), Citigroup may be right.
It really could be time to buy Momo.