4 Reasons Momo's High-Growth Days Are Over

Momo (MOMO 0.70%), the Chinese tech company that owns two of the country's top dating apps, was once considered a promising growth stock. But last year Momo's growth decelerated after Chinese regulators cracked down on its namesake app and its Tinder-like Tantan app over allegations of inappropriate content.

Momo and Tantan's news feeds were temporarily disabled, and Tantan was pulled from China's app stores. Both apps were eventually restored, but Momo's fragile recovery stalled out this year as the pandemic throttled the growth of its online dating and live streaming businesses.

Image source: Getty Images.

China mostly contained the pandemic by April, but Momo's business didn't recover alongside the country's other big tech companies. Instead, its revenue declined year-over-year for three straight quarters, and it expects that pain to continue for the foreseeable future.

As a result, Momo's stock tumbled about 60% this year, and its low forward P/E of 7 now makes it look like a value trap instead of an undervalued growth stock. Let's review the four main reasons Momo's business fell of a cliff, and whether or not it can ever recover.

1. Its live streaming business is dying

In the third quarter of 2015, Momo launched a live video streaming platform for its main app. This feature, which let viewers buy virtual gifts for their favorite broadcasters, caught fire and became Momo's core growth engine.

Momo's live streaming business accounted for 79% of its top line in 2016. The segment's revenue nearly tripled in 2017, rose 41% in 2018, and grew 15% in 2019. Its impact on Momo's revenue is easy to spot:

Source: YCharts

But the business lost its momentum in 2019 due to the saturation of the live streaming market and the temporary suspensions of Momo and Tantan's services from April to July. That pain continued throughout the first three quarters of 2020:

Source: Momo. YOY = Year-over-year. *Based on the average exchange rate during the quarter.

Momo blamed that slowdown on the COVID-19 crisis during all three quarters. It claims the pandemic caused its paying users, particularly its "top of the pyramid" spenders, to spend less money.

But Momo is also likely losing users to competing platforms. In the first nine months of 2020, Bilibili (BILI 10.97%) -- the Gen Z-oriented digital media platform for games, comics, and live video -- more than doubled its live broadcasting and value-added services revenue year-over-year to $397 million. Huya (HUYA 4.06%), Tencent's (TCEHY 3.23%) live streaming platform for video games and e-sports, grew its live streaming revenue 33% year-over-year to $1.1 billion during the first nine months of the year.

2. Its user growth has stalled out

Momo hosted 113.6 million monthly active users (MAUs) on its main app at the end of the third quarter, which marked a decline from 114.1 million a year ago. Momo and Tantan's total number of paid users also dipped year-over-year from 13.4 million to 13.1 million.

During last quarter's conference call, Momo CEO Li Wang noted its user acquisition costs were increasing because online education, gaming, and e-commerce companies were buying more ads and driving up ad prices. Wang warned that if the ad market remains "challenging" in December, Momo's growth in users could remain "moderate" in the fourth quarter.

In other words, Momo needs to buy more ads to gain users, but China's ad channels are too crowded and pricey. Momo's inability to expand without big ad campaigns is a bright red flag, and strongly suggests it's losing users to competing social platforms like Tencent's WeChat.

3. Its strengths can't offset its weaknesses

Momo is diversifying its value-added services (VAS) business -- which generates revenue from sales of non-live video virtual gifts, subscriptions, and other services on Momo and Tantan -- to reduce its dependence on its live video platform.

Momo's VAS revenue rose 27% year-over-year in the first nine months of 2020, led by the monetization of Tantan's dating features, and accounted for a third of its top line. That growth was encouraging, but it couldn't offset its other weaknesses.

4. A dim outlook for the future

Momo's revenue and net income declined 9% and 24%, respectively, in the first nine months of 2020. It expects its revenue to drop 20%-22% year-over-year in the fourth quarter, which implies a full-year decline of about 12% in RMB terms. Analysts expect its revenue and earnings to decline 7% and 36%, respectively, this year in USD terms.

Momo's growth might improve next year if it can stabilize its streaming business and stop losing MAUs, but its high-growth days are clearly over. Its stock might look cheap, but investors should stick with Chinese tech companies that have stronger growth potential instead of betting on Momo's murky turnaround plans.