To say that Momo(NASDAQ: MOMO) has been on fire is an understatement. Up over 200% in the past 12 months, Momo is hands down one of the best performing tech stocks out there.
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As with any hot tech company, it's not hard to believe that the valuation has potentially gotten ahead of itself. The company currently trades at a lofty 14 times revenue. Any hiccup in the business can send the stock crashing. While Wall Street is looking at the future with rose-colored glasses, let's take a look at some of the risks of investing in Momo.
Live video fuels bullish stock run
Growth has been extraordinary, and the company's recent success has been no fluke. In 2015, Momo began offering live video and in the fourth quarter of 2016, it launched a service which allows users to purchase and send virtual gifts to other users outside of its live video platform.
Before live video, the company's main offering was an online dating service. The transition has proven to be the right move as live streaming is taking off in China. According to Credit Suisse, the live-streaming industry doubled in size last year to about $3 billion, nearly half the size of China's $7 billion film industry.
Momo is only in the early phase of this trend, and its growth is astonishing asrevenue, profits, users, and the stock price all trend upwards:
Data source: Momo. Dollar values in millions.
Government regulation of live streaming
Momo users send those virtual gifts as a token of appreciation to content creators. As it turns out, in the early days, that content was often just a peep show, effectively turning Momo and other live streaming sites into distributors of explicit content.
China's Ministry of Culture (MOC) caught on quickly and implemented rules that restricted content on these sites. Additionally, the MOC now requires online streaming platforms to obtain a license from the government and to endure a 60-day waiting period to allow time for a regulatory checkup. Violations of the new rules can mean an outright ban for the stock, leaving the burden on companies like Momo to ensure they maintain a clean service.
Some believe that the new regulations might be a plus for Momo and other industry leaders. In a research note from Deutsche Bank, analysts noted that the rules would make it more difficult for new entrants to occupy the streaming space.
Not the only game in town
Smaller players may be kept at bay, but that doesn't mean companies with more resources won't try their hand at live streaming. The largest such platform in China is currently YY. With over $1 billion in streaming revenue and 152 million monthly active users, the company is well ahead of Momo.Additionally, Tencentinvested in the broadcasting app Kuaishou, which announced plans to work with Tencent and Baiduon its platform. With 900 million users on its WeChat messaging service, the opportunity for Tencent may just be large enough to become the new leader in video streaming.
In Momo's defense, the industry is still young and in the hyper-growth stage. There may be enough business to go around for many competitors. In this fragmented state, there is also the possibility of Momo being acquired by one of the Chinese tech giants looking to move quickly and aggressively into the space.
Are virtual gifts a fad?
I'm still trying to wrap my head around the fact that people will pay for a digital sticker, and give it to a stranger who is doing cool stuff on the internet. These stickers can range from flowers to exotic cars and have a price that starts at a couple pennies. I'm likely just showing my bias -- after all, I regularly skip YouTube ads so I can quickly watch my free content. The gifting model has alsoshown some success in the western world asBeijing-based Live.me is claiming to have processed $1 million in virtual gifts.
Image source: Momo.
With the live-streaming market growing to $3 billion, the business model may be mature enough to be past the fad stage. That doesn't mean there aren't risks to the business model, especially for a smaller player like Momo. However, if it continues to execute with a popular product and strong user growth, the stock's run may just be getting started.
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