Shares of Momo (NASDAQ: MOMO) plummeted 19% on Tuesday after posting poorly received financial results. Stagnant sequential growth in premium users and uninspiring guidance for the new quarter tripped up the Chinese social video speedster. It may seem like par for the course for Momo investors. The stock also took a 20% hit the day it posted problematic second-quarter results three months earlier.
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Momo has now taken a hit on earnings day in four of the past five quarters, but surprisingly enough, the stock is still beating the market in 2017, with a 36% gain year to date through Tuesday's close. The annual gain may not come as much of a consolation to recent investors, as the stock has fallen sharply since peaking in mid-August and is now trading at levels last seen in February.
Beat and graze
Revenue soared 126% to hit $354.5 million for the third quarter. Momo's own top-line guidance back in August was calling for just $337 million to $342 million, up 115% to 118% since the prior year's showing. Live video continues to be the key driver to Momo's heady growth, now accounting for more than 85% of the revenue mix.
Many online models are scalable where a big gain on the top line gets even bigger on the bottom line, but it's not cheap running a live video platform. Adjusted earnings may have roughly doubled to $0.45 a share, but that failed to match the 126% surge in revenue.
Momo's popularity continues to grow, closing out the period with 94.4 million monthly active users in September. However, one of the pressure points in the report is that Momo had 4.1 million paying users for live video, exactly where we were at the end of the first and second quarters this year. The company is doing a good job of milking more money out of its premium accounts, but its inability to convert more of its freeloaders into paying users is a sore spot in the report.
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Guidance is also weighing on the stock. Momo is targeting $370 million to $385 million in revenue for the fourth quarter, 50% to 56% higher than a year earlier. Decelerating growth isn't necessarily a surprise, but this will be Momo's weakest year-over-year growth as a public company and only the second time that it doesn't post triple-digit top-line growth.
A silver lining in the carnage is that the stock's drop and rising earnings are treating today's investors to the lowest earnings multiple on Momo since its IPO in late 2014. The shares closed Tuesday at just 15 times trailing adjusted earnings. A reasonable multiple in the mid-teens may not seem like much of a bargain if Momo can't get more of its users to pay up or if growth continues to decelerate at an alarming clip, but in a world of high-flying Chinese internet stocks with lofty valuations to boot, Momo may seem more appetizing following Tuesday's disappointing market reaction.
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