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Will Momo Keep Climbing After Rallying Nearly 40% in 2019?

By Leo Sun – Aug 27, 2019 at 3:00PM

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This growth stock is still valued like a value stock.

Momo (MOMO -6.33%), which owns two major dating apps in China, was a divisive stock for the bulls and bears over the past year. The bulls argued that Momo's core market was well insulated from any trade war worries, but the bears claimed that a government crackdown on one of its main apps, Tantan, indicated that its business was walking on eggshells.

Nonetheless, Momo shook off some of those concerns over the past two quarters, and its stock remains up nearly 40% for the year. Let's dig deeper into Momo's latest quarterly report and see if the stock can keep bucking the economic slowdown in China.

A smartphone user uses a dating app.

Image source: Getty Images.

Understanding Momo's business

Momo's eponymous app lets users find other users based on their locations and interests. Tantan, which it acquired last year, is a dating app that clones Tinder's swiping features and premium benefits.

These two apps are often called the "Tinders of China". Momo closed its acquisition of Tantan in the second quarter of 2018, and the new app boosted its revenue and user growth throughout the second half of the year.

But in May Momo was slammed by a triple whammy of headaches: Chinese regulators abruptly ordered the removal of its Tantan app from Chinese app stores, Apple suspended in-app payments in Tantan, and Momo suspended news feed posts for both Momo and Tantan pending an internal review.

Those restrictions were fully lifted in mid-July, but they caused Momo's growth to decelerate significantly over the past two quarters:

YOY growth

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Revenue

58%

51%

50%

35%

32%

Momo MAUs

18%

17%

14%

11%

5%

Paid users

(Momo and Tantan)

63%

71%

67%

73%

2%

YOY = Year-over-year, MAUs = monthly active users. Source: Momo quarterly reports.

Nonetheless, Momo's second-quarter revenue of 4.15 billion RMB ($605 million) cleared expectations by $20 million, and its MAUs continued rising after lapping the Tantan acquisition. It ended the quarter with 113.5 million MAUs on Momo, and 11.8 million total paid users across both apps. That total included 3.2 million paying Tantan users, up from 3.1 million a year earlier.

How Momo makes money

Momo's revenue from its namesake app rose 24% annually during the second quarter and accounted for 93% of the company's top line. That growth was supported by the growth of its subscriptions (which unlock more social search features) and its live video platform, which lets viewers buy gifts for their favorite broadcasters.

The growth of those services offset the app's declining ad revenue, which was throttled by the aforementioned government probe -- which mainly centered on inappropriate ads across its network. Momo's revenue from mobile games also fell as the company pivoted away from the saturated gaming market.

A young woman broadcasts a live video on her smartphone.

Image source: Getty Images.

The remaining 7% of Momo's revenue came from Tantan, which boosted its sales more than nine-fold annually as it added more subscribers for its paid services, which provide users with advanced search and exposure features. That growth was impressive considering that Tantan's download and payment services were only restored at the end of the second quarter.

Momo's growth engines seem to be firing on all cylinders, but its guidance for 17%-19% annual revenue growth indicates that its growth is still decelerating. Wall Street expects its revenue to rise 27% for the full year.

Impressive profit growth at a reasonable valuation

Momo's top-line growth is decelerating, but its profits -- which were wobbly in the quarters after the Tantan acquisition -- are stabilizing. During the second quarter, its adjusted net income rose 39% annually to 1.24 billion RMB ($181 million), or $0.82 per ADS, which crushed expectations by a dime.

Momo didn't provide any bottom-line guidance, but analysts anticipate 29% earnings growth for the third quarter and 23% for the full year. Those are stellar growth rates for a stock that trades at about ten times forward earnings, and indicate that the stock's year-long rally isn't over.

Momo's growth closely mirrors the growth of Match Group (MTCH), the parent company of Tinder. Both companies are well-insulated from the trade war, and enjoy market-leading positions in online dating. Match is on a similar growth trajectory as Momo -- it expects its revenue to rise by the "high teens" this year and for its adjusted EBITDA to climb 20%. However, Match is also much pricier than Momo at over 40 times forward earnings.

The bottom line

I've been bullish on Momo before, and I think that it could still rise higher for three reasons: It's a growth stock that trades like a value stock, its core business is immune to the trade war, and its regulatory challenges have been resolved. The stock will likely remain volatile as the trade war drags on, but it could climb much higher over the next few years.

Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Match Group. The Motley Fool has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool recommends Momo. The Motley Fool has a disclosure policy.

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