5 Reasons I Don't Buy MeetMe's Growth Story

By Leo Sun Markets Fool.com

Last December, I highlighted MeetMe (NASDAQ: MEET) as a potentially undervalued growth play in a frothy market. The social networking app maker posted eye-popping numbers last quarter -- 32% annual growth in monthly active users (MAUs), 20% growth in total revenues, and 30% non-GAAP earnings growth.

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Analysts expect MeetMe's revenue and non-GAAP earnings to respectively rise 38% and 16% next year. Yet the stock trades at just 7 times trailing earnings and 10 times forward earnings. Let's take a look at the five key reasons investors aren't buying MeetMe's growth story, despite its high growth figures and low valuations.

MeetMe's mobile app. Image source: Google Play.

1. A troubling history with sexual predators

MeetMe lets users find new people in their area to chat with, similar to Match's (NASDAQ: MTCH) Tinder. While there's nothing inherently sinister about the app, there have been multiple reports of MeetMe being used by sexual predators.

In 2014, the City of San Francisco sued MeetMe for the unlawful publication of minors' profiles, photos, and geolocation data, and claimed thatthe app "enabled" sexual predators to find their victims. The city cited several cases involving adult men and minors in which MeetMe was used. MeetMe settled the case for $200,000 thefollowing year, agreeing to clarify and simplify its user agreements and settings, and reducing the amount of data displayed on minors to their city and state.

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But the cases involving MeetMe didn't cease -- last February, a Buffalo man wascharged with multiple counts of child pornography after using MeetMe to find minors. MeetMe's troubles raised red flags at Tinder, which hiked its age limit from 13 to 18 last June. Yet MeetMe still hasn't followed suit, presumably because it would lose a large portion of its users.

2. The potential loss of ad revenues

You'd think that big companies would be reluctant to advertise on MeetMe, but plenty of big brands still advertise on the app. That's because MeetMe generates most of its ad revenues from programmatic ads delivered by Twitter's (NYSE: TWTR) MoPub.

This means that MoPub's customers simply pick a demographic -- in MeetMe's case, younger users and Millennials -- and the platform feeds the ads to various apps. This means that many companies probably don't realize that their ads are appearing on MeetMe.

Therefore, a common bear thesis is that MoPub could decide to drop MeetMe due to violations of its terms of service, or advertisers could ask MoPub to pull their ads from the controversial app. There's no evidence either of these scenarios will occur, but it raises a troubling question -- if MeetMe's reputation worsens, can it still keep growing its ad revenues?

3. Being booted from the app stores

In its 10-K filing for fiscal 2015, MeetMe admitsthat its business will suffer if it is "unable to maintain a good relationship" with Apple and Alphabet's Google. It notes that its app could be pulled from their app stores "if we violate" or the companies believe "that we have violated" their terms and conditions.

The bulls might believe that's just a typical "risk factor" warning, but MeetMe admits in the same filing that "on more than one occasion," Apple rejected its app "because of user generated content and other concerns." This indicates that another high-profile lawsuit could knock MeetMe out of the app stores and kill its business.

4. Tinder is crushing MeetMe

MeetMe arrived before Tinder, which was initially launched in 2012. But over the past five years, mainstream interest in MeetMe waned in correlation with Tinder's growth, as seen in this chart from Google Trends:

Image source: Google.

That decline also explains why MeetMe acquired its competitor Skout lastOctober. That move boosted the company's MAU count from about 5 million to8.5 million, and greatly inflated MeetMe's top and bottom line growth for fiscal 2016.

5. The lack of insider confidence

If MeetMe is as undervalued as the fundamentals suggest, you'd expect insiders to be loading up on shares. However, MeetMe CEO Geoffrey Cook justsold 250,000 shares (16% of his entire position) at an average price of $5.02.

Including Cook's sales, insiders sold1.96 million shares over the past 12 months, but only bought 334,000 shares. It's understandable that MeetMe's insiders would sell after the stock's 50% rally over the past 12 months, but it also indicates that its upside potential could be limited.

The key takeaway

The main lesson here is to always look beyond the valuations and growth forecasts. On the surface, MeetMe looks like a rapidly growing social app maker trading at a discount to its peers. But dig deeper, and you'll see an app that's struggling to prove that it's not a tool for criminals while remaining relevant against Tinder, which dominates the space withover 50 million active users.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Twitter. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Match Group. The Motley Fool has a disclosure policy.