Can Momo Stock Bounce Back After Last Week's 19% Drop?

Markets Motley Fool

One of this week's biggest losers was Momo (NASDAQ: MOMO), tumbling 18.8% after posting fresh financials. Revenue and earnings more tripled in the second quarter, exceeding expectations on both fronts, but sequential stagnancy in paying users raised concerns about Momo's long-term prospects.

Continue Reading Below

The Chinese dating-app specialist has been on fire since the it transformed itself into a leading live video platform with broader appeal. Growth has been scorching, with revenue climbing 215% to $312.2 million in last week's report, well above its earlier guidance calling for a 186% to 191% top-line surge. However, closing out the period with the same 4.1 million paying users it had during this year's first quarter proved problematic for a company that otherwise remains one of this year's hottest performers. Momo stock has soared 94% so far this year, even after last week's slide.

Beating on the bottom line isn't enough

Momo's adjusted profit of $0.35 a share landed well ahead of the $0.31 analysts were targeting on the same basis. The beat isn't a surprise. Momo has trounced Wall Street profit expectations with ease over the past few quarters.

Quarter EPS Estimate EPS Surprise
Q2 2016 $0.08 $0.12 50%
Q3 2016 $0.14 $0.24 71%
Q4 2016 $0.30 $0.44 47%
Q1 2017 $0.32 $0.44 38%
Q2 2017 $0.31 $0.35 13%

Momo has beaten bottom-line forecasts by a double-digit-percentage margin consistently, but that hasn't been enough. The stock has now fallen the day after quarterly results came out in three of the past four periods. And if you go over the past few quarters, you'll see that last week's beat was tame by comparison. Analysts may be finally starting to catch up to Momo.

Continue Reading Below

At least one Wall Street pro came to Momo's defense. Karen Chan at Jefferies reiterated her "buy" rating and $54 price target, calling the pullback a buying opportunity. She's encouraged by Momo's guidance for the current quarter as well as a healthy spike in average revenue per user, as gains in advertising are offsetting the sequential stall in paying users.

The sell-off, paired with a couple of analysts who are inching their profit forecasts higher, creates a compelling valuation. Momo is now trading for 22 times this year's projected earnings and less than 16 times next year's higher target. Momo is clearly growing a lot faster than its multiple suggests, but fears of Chinese regulatory changes and shifting consumer habits will be risks that keep the valuations in check. 

10 stocks we like better than Momo
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Momo wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Momo. The Motley Fool has a disclosure policy.