Even prior to the pandemic the stock of Chinese online dating firm Momo (NASDAQ:MOMO) has been on a downtrend. The company has had a rough few years after running afoul of state regulators and feeling the effects of the coronavirus pandemic.
MOMO stock currently trades at around $15.90. A lot of the bad news regarding slowing revenue has already been discounted into the current share price. This leads me to believe that the company could be potentially undervalued at these price levels.
MOMO Stock Has a Lot of The Negatives Already Priced In
Momo’s recent earnings surprised Analysts as the company beat earnings expectations by 16%. Despite the earnings beat, the company still posted negative growth for the quarter and the full year. In Q4 2020, Net Revenues decreased by 19.0% from 4.7 billion RMB to 3.8 billion RMB (roughly $581.6 million). Full-year 2020 revenues decreased by 11.7% compared to 2019 to 15 billion RMB .
Despite the revenue decline, Momo still has a solid long-term competitive advantage. Momo owns two of China’s top dating apps, its namesake Momo and Tantan which it acquired in 2018. The company is structured so that the Momo app is the older “cash cow” while Tantan is the newer faster-growing app.
Unlike Western dating apps from Match Group (NASDAQ:MTCH) or Bumble (NASDAQ:BMBL) which rely on ads and subscriptions, Momo relies heavily on live video services for its revenues. Both the Momo app and Tantan heavily utilize live streaming as their revenue source. Live streaming made up roughly 64.1% of revenues in 2020 and 73% of revenues in 2019.
In 2020 live streaming revenue declined a massive 31.2% as its top-paying users tightened their purse strings. Total paying users of the live video service declined from 13.8 million in 2019 to 12.8 million in 2020. As live streaming revenue is mostly derived from virtual “gifts” and “tips”, it is much more discretionary. Therefore the economic uncertainty caused by the pandemic has affected Momo’s revenues much more than its Western counterparts.
Momo is Ready For a Turn-around
The company reformed its live stream business in August 2020 in order to focus more on long-tail content and reduce reliance on “big spenders”. This will ensure that the business is in a healthier state post-pandemic. As China continues to vaccinate its population, the restrictions on social interactions will begin to ease, and life return to normal. Therefore Momo could have a potential revenue jump in 2021 as social interaction-based live-streaming begins to pick up.
Apart from the resurgence in its live streaming business, there are two other catalysts that could send MOMO stock higher. The company has been strengthening its value-added services revenue which increased by 24.5% in 2020. Value-added services consist of additional features and functions as well as virtual items. The company has stated in its earnings call that 80% of time spent in the Momo app is not related to live streaming. Therefore with new innovative products, Momo can reduce its dependence on live streaming and transition into a more “social networking” product.
Tantan is another catalyst for massive growth as the app is the closest thing China has to Tinder. The company has said that Tantan is still a “relatively young brand” and that there is still room to grow its user base. Tantan seems to appeal to the Gen Z market, and thus shows a lot of potential. In the earnings, call management has detailed plans to further increase marketing spending and to optimize the overall experience.
Investor Takeaway
Citi analyst Yiwen Zhang upgraded the rating of Momo from “Neutral” to “Buy,” giving the stock a price target of $19.30. Zhang believes that live-streaming revenue will start to recover in Q2 2021. Momo ended 2020 with EPS of $0.77 using the share price of $15.90 gives us a 2020 P/E of about 20.6x. This implies the stock is fairly valued at these levels.
However, this doesn’t take into account the company’s massive cash reserves. The company has about 10.9 billion RMB o in cash against long-term debt of 4.6 billion RMB. Taking this net cash position into consideration, Citi states that the current market cap implies a 2.5x 2022 P/E. Using Citi’s price target, Momo has about a 21% upside in the short-term. In the long-term though, as stated earlier, Momo has multiple potential catalysts that could surprise analysts on the upside.
I think Momo is a solid addition to an investment portfolio.
On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article.