Momo Growing So Slow Isn't a No-No

Slowing revenue growth and contracting margins don't appear to be deal breakers for Momo (NASDAQ: MOMO) investors these days. Shares of the Chinese social video and online dating specialist kicked off the holiday-abridged trading week by moving higher after posting its first-quarter results on Tuesday morning.

Net revenue rose 35% to land on $554.7 million through the first three months of 2019. We've seen Momo's top line decelerate in eight of the past nine quarters, but it's all relative. This may be a swift slowdown from the 50% top-line gain it posted last time out, but once again we find Momo outpacing its earlier guidance. Momo's outlook back in March was calling for just 28% to 32% in revenue growth for the quarter.

Deceleration isn't fatal

Momo gained traction with both investors and Chinese consumers when its live video broadcasting platform started to take off, and it remains the primary driver here, contributing 72% of the quarter's revenue. However, the revenue leader at Momo is now a relative laggard. The segment's top-line increase of 14% actually sandbagged results.

It is Momo's value-added services business -- a segment that includes membership subscription and virtual gift revenue -- that is spicing things up with its 285% top-line surge. Value-added services now account for nearly a quarter of Momo's results. There were declines in its mobile gaming and mobile marketing segments, but they are irrelevant segments at Momo, combining for just 3% of the revenue mix.

Momo's popularity is still moving in the right direction, but growth is naturally slowing. There were 114.4 million monthly active users on the app in March, a marginal sequential uptick from the 113.3 million it was serving in December and a modest year-over-year boost from 103.3 million. Momo's revenue growth is outpacing its audience gains as the company improves its revenue per paying user and has a larger percentage of its free users shelling out for premium services.

The bottom line isn't pretty. Costs and expenses have shot 83% higher over the past year, as personnel-related increases at the Tantan online dating platform it acquired last year, a spike in revenue sharing with broadcasters and virtual gift recipients, and a surge in marketing and promotional initiatives weighed on reported results. Even on an adjusted basis Momo's bottom line was flattish, with net income rising slightly but dipping marginally on a per-share basis. Investors were bracing for a ho-hum showing on the bottom line, and Momo's adjusted earnings of $0.62 a share -- while a year-over-year decline -- is actually considerably better than what the market was expecting.

Deceleration isn't going away. Momo's initiated guidance on Tuesday calls for just 27% to 30% in revenue growth for the second quarter. The stock will continue to be volatile, but it remains very profitable, with a cash-rich balance sheet to weather any potential storm. This is the fifth time in the past six quarters that Momo has opened nicely higher after posting financial results, and for investors that's the more lucrative streak than ones going the other way with slowing top-line growth and contracting margins.

10 stocks we like better than MomoWhen 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 quadrupled the market.*

David and Tom just revealed what they believe are the ten 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.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

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