Why Shares of Momo Inc. Are Plunging Today

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What happened

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Shares of Chinese mobile social networking platform provider Momo Inc. (NASDAQ: MOMO) tumbled on Tuesday despite an overwhelmingly positive second-quarter report. The company beat analyst estimates across the board, and its guidance for third-quarter revenue was well ahead of expectations. A lofty valuation may be why investors are selling off the stock. At 11:50 a.m. EDT, Momo was down about 18%.

So what

Momo reported second-quarter revenue of $312.2 million, up 215% year over year and about $26 million higher than the average analyst estimate. Live video service generated $259.4 million of revenue, up from $57.9 million in the prior-year period, driven by 4.1 million paying users. Value-added service revenue rose 58% to $24.6 million, mobile marketing revenue grew 15% to $19.0 million, and mobile game revenue jumped 23% to $9.1 million. Companywide monthly active users totaled 91.3 million, up from 74.8 million one year ago.

Non-GAAP diluted net income per ADS was $0.35, up from $0.08 in the prior-year period and $0.04 higher than analysts expected. The earnings surge was driven by higher revenue, partially offset by rapidly rising costs.

For the third quarter, Momo expects to produce revenue between $337 million and $342 million, up 115% to 118% year over year. Analysts were anticipating revenue guidance of $307 million.

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Now what

While Momo reported incredible growth that was well ahead of expectations and its outlook called for continued triple-digit revenue growth, the stock is unquestionably priced optimistically. With a market capitalization of nearly $9 billion prior to Tuesday's slump, Momo traded for about nine times trailing-12-month sales, including the second-quarter results.

Momo's results may have simply not been good enough to justify that valuation in the eyes of the market.

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David Gardner has no position in any of the stocks mentioned. Timothy Green has no position in any of the stocks mentioned. Tom Gardner has no position in any of the stocks mentioned. The Motley Fool recommends Momo. The Motley Fool has a disclosure policy.