What happened

Shares of Momo (NASDAQ:MOMO) slipped 10.5% in December, according to data from S&P Global Market Intelligence. The China-based online dating company's stock sold off due to concerns about competing offerings from a powerful rival and new government regulations.  

MOMO Chart

MOMO data by YCharts.

Chinese tech stocks rallied in December as news about a "phase one" trade deal with the U.S. and the halting of impending tariffs portended a more favorable macroeconomic environment, but Momo sat out the rally. The threat of new dating-focused apps from Tencent and moves from China's regulators stand out as the most likely catalysts for the company's stock slump last month.

A woman holding a mobile phone and a cup of coffee.

Image source: Getty Images.

So what

Momo operates the two most-used social dating apps in the Chinese market, but it's not immune to competition. Tencent owns and operates WeChat, the country's most-used app, and that gives the tech giant big network advantages that could work to its favor in the online dating market. 

Tencent launched Dengyu Jiaoyou, its dating-focused anonymous messaging platform, in mid-December. This came on the heels of the rollout of its video-based online dating app Maohu and its Tinder-style dating app Qingliao in November. Tencent is clearly intent on building its position in China's online dating market, and that presents a meaningful threat to Momo's leadership in the category.

Momo stock may also have been pressured by moves from Chinese regulatory bodies. China rolled out new regulations targeting applications used to create deepfakes, which typically superimpose a person's face onto another person's body. The country also announced that it had penalized over 100 companies for improperly collecting and utilizing user data since November. Momo had previously been penalized for data-collection practices with its Zao deepfake app, and moves by government regulators remain a risk factor for the broader business. 

Now what

Momo stock has regained some ground in January, with shares trading up roughly 7.8% in the month so far.

MOMO Chart

MOMO data by YCharts.

China's online dating market probably won't be a winner-take-all space, and Momo stock could continue to deliver strong returns as long as it can provide experiences that resonate with its users. The company is guiding for sales to come in between 4.52 billion yuan ($650 million) and 4.62 billion yuan ($660 million), representing year-over-year growth of 19% on a Chinese currency basis at the midpoint of the target.

Shares are valued at roughly 11 times this year's expected earnings and 2.6 times expected sales.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.