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Momo Remains Resilient as China Moves Past the Coronavirus Crisis

By Leo Sun - Mar 20, 2020 at 12:40PM

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Is it time to swipe right on “China’s Tinder” again?

Shares of Momo (MOMO 0.20%), the biggest online dating company in China, tumbled over the past three months as the novel coronavirus crisis killed the aging bull market. However, the stock recently rebounded after its fourth-quarter numbers beat analysts' estimates.

Momo's revenue rose 22% annually to 4.69 billion yuan ($673.4 million), beating estimates by $17.7 million. Its net income grew 60% to 1.06 billion yuan ($151.7 million). On a non-GAAP basis, its net income rose 41% to 1.25 billion yuan ($179.9 million), or $0.81 per ADS -- which beat estimates by seven cents.

Hearts floating out of a smartphone.

Image source: Getty Images.

Let's see why Momo's business remained resilient as the coronavirus outbreak started in China, and why its growth should stabilize as China's infection rates slow down.

The key numbers

Before we review Momo's growth rates, we should remember two things. First, Momo bought the smaller dating app Tantan in mid-2018. Second, Tantan was temporarily pulled from China's app stores last year due to allegations of inappropriate ads, and Momo suspended news feeds on both Tantan and its own app for internal reviews.

Momo's services were fully restored last summer, but the disruption throttled its growth in the second quarter of 2019. That deceleration continued in the third quarter, but stabilized during the fourth quarter.

Growth (YOY)

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Revenue

50%

35%

32%

22%

22%

Net income*

22%

1%

39%

40%

41%

YOY = Year-over-year. Source: Momo quarterly reports. *Non-GAAP.

Momo's core app monthly active users (MAUs) rose 1% annually to 114.5 million. Its total number of paid users across both apps rose 6% to 13.8 million. Within that total, Tantan's number of paid users rose 15% to 4.5 million.

A person uses a dating app.

Image source: Getty Images.

Momo stated that the average time spent on its main app hit a two-year high, and that its retention rates on both Momo and Tantan had rebounded to pre-suspension levels. New features -- including video-based matchmaking, social mini games, and a lighter version of the app for lower-bandwidth markets -- locked in more users.

Momo's live streaming revenue rose 14% annually and accounted for 72% of its top line. Its value-added service (VAS) revenue, which mainly comes from virtual gifts on Momo and subscriptions on Tantan, surged 65% and accounted for 25% of its top line.

The rest of Momo's revenue came from mobile ads and games. Revenue from both businesses declined as Momo prioritized the growth of its live streaming and VAS segments.

Momo's total costs and expenses only rose 12% annually during the quarter, even as it faced tough pressure in the live streaming space from rivals like JOYY (YY 8.73%). As a result, its operating margin expanded 620 basis points annually to 26.7%.

Moving past the coronavirus outbreak

Momo expects its revenue to decline 5%-7% annually in the first quarter as it absorbs the impact of the COVID-19 outbreak in China. By comparison, JOYY still expects its revenue to rise 41%-43% annually during the first quarter, since it generates a large portion of its revenue overseas.

Momo attributes its slowdown to macro headwinds curbing the spending habits of high-paying users, delayed returns to big cities and social distancing efforts throttling demand for dating services, and adjustments to some interactive features on Momo.

During the conference call, IR chief Cathy Peng stated that those headwinds impacted Momo the most in February, when many Chinese cities were locked down, but that it saw a "gradual recovery" in traffic and revenue throughout March as the infection rates waned. That comment strongly suggests that Momo's slowdown will be short-lived, and that the stock is dirt cheap at seven times its trailing non-GAAP earnings.

Is it the right time to buy Momo?

Momo carved out a defensible niche in China's crowded tech market with its dating apps. Its business is still expanding, its growth should accelerate again after the crisis passes, and its stock looks undervalued. The stock could keep dropping along with the broader market, but investors who accumulate some shares now could be well-rewarded over the long term.

 

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