Is Momo a Buy?

Another year of strong organic growth for Chinese social media app Momo (NASDAQ: MOMO) -- plus its acquisition of match-making peer Tantan in the spring of 2018 -- did not equate to much in the way of share price appreciation in 2018. After doubling in the first half of the year, the stock promptly reversed course and gave up all of its gains and then some, losing 3% in 2018.

The upshot for the company is that its growth story remains intact, albeit at a slower clip than in the recent past. While that may not indicate completely clear skies ahead for the social and entertainment technologist, the stock does look like a value.

When good isn't good enough

Momo is still expanding at an extremely healthy rate. During the third quarter of 2018, revenue improved 51% year-over-year, monthly active users increased by 17% to 110.5 million, and paying subscribers increased by 71% to 12.5 million, although 3.6 million of those new subscribers came via the Tantan buyout.

Nevertheless, Momo's momentum is slowing as of late. A top line growing north of 60% at the beginning of the year curbed to 51% in the third quarter. Also, the 17% increase in monthly active users in the third quarter represents a cooled-down cadence from the 21% pace set during the first quarter.

Alongside third-quarter results, management advised investors to expect revenue to grow 43% to 47% year-over-year in the fourth quarter of 2018. Paired with an overall bad year for Chinese stocks, the decelerating results put Momo investors in a sour mood the second half of 2018.

The upshot...

It's true that Momo is losing steam, but revenue growth north of 40% is nothing to get too upset about. Plus, while the company continues to invest in itself to maximize growth, it's worth noting that the social app is still a very profitable concern.

Momo' stock is currently priced at 11.7 times trailing 12-month earnings, and the company's forward 12-month price to earnings (PE) ratio based on analyst expectations is 8.5. That implies a big gain in the bottom line in the year ahead, even as Momo continues to dump money into its social network and entertainment productions. For the sake of comparison, Tencent Holdings (NASDAQOTH: TCEHY) -- the owner of China's largest social network platform, WeChat -- improved year-over-year revenue 24% in the third quarter of 2018 and carries a trailing 12-month PE ratio of 28.1.

That makes Momo a good value relative to its larger peer, both from a revenue growth and a valuation standpoint. While Tencent has other irons in the fire that could drive results -- like its video game, cloud computing, and investment arms -- Momo's stock shouldn't be dismissed after its big pullback. Investors willing to stomach a little volatility should add this one to their watch lists.

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Nicholas Rossolillo and his clients own shares of Tencent Holdings. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool recommends Momo. The Motley Fool has a disclosure policy.