Momo's Momentum Returns as Censorship Fears Fade

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Momo (NASDAQ: MOMO), the owner of two top dating apps in China, shed 30% of its value over the past 12 months as investors fled Chinese tech stocks amid the escalating trade war. It was also hit by a triple whammy of bad news over the past month -- regulators ordered the removal of its Tantan app from Chinese app stores, Apple suspended in-app payments for Tantan, and the company voluntarily suspended news feed posts in both Momo and Tantan for an internal review.

China's regulators didn't order Momo to discontinue the apps for existing users, but the suspensions would likely throttle its ability to gain new users. However, Momo allayed some of those concerns with its earnings report on May 28, which featured solid growth during the first quarter and a stable outlook for the second quarter.

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The key numbers

Momo's revenue rose 35% annually to 3.72 billion RMB ($555 million) in the first quarter, beating estimates by $23 million. Its monthly active users (MAUs) on Momo and Tantan increased 11% to 114.4 million, while its paid users on both apps jumped 73% to 14 million. Those growth rates look solid, but Momo's growth in revenue and MAUs decelerated significantly over the past year:

YOY growth

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019

Revenue

64%

58%

51%

50%

35%

MAUs

21%

18%

17%

14%

11%

Paid users

16%

63%

71%

67%

73%

Moreover, Momo's numbers from the second quarter of 2018 onward included its acquisition of Tantan. Without the addition of Tantan's 5 million paid users, Momo's paid user base would have only grown 11% during the first quarter.

Momo generates most of its revenue from its namesake app's live video platform, which allows viewers to tip their favorite broadcasters. Its live video revenue rose 14% annually during the quarter and accounted for 72% of its top line.

Another 24% of its revenue came from its faster-growing value-added services (VAS) business, which lets users buy virtual gifts for their favorite broadcasters and subscribe to Momo and Tantan's premium dating services. Revenue from that unit surged 285% during the quarter.

The remaining slice of Momo's sales comes from its mobile marketing and gaming units, which are being phased out in favor of its live video and online dating services. As a result, its marketing revenue fell 32% and its gaming revenue declined 8%. Momo's reduced dependence on ads is a smart move, since Chinese companies that are too dependent on ads -- like Baidu (NASDAQ: BIDU) and SINA (NASDAQ: SINA) -- recently struggled with slower ad spending.

Momo expects its revenue to rise 27% to 30% annually during the second quarter. During the conference call, CEO Wang Yu said the estimate was a "conservative" one that assumes that the aforementioned suspensions will "last throughout the quarter" as Tantan's revenue declines by a "low to mid-teen" percentage sequentially.

That forecast is encouraging, since it indicates that Momo can still squeeze out revenue from its namesake app's existing users with both hands tied behind its back. It also suggests that Momo could easily beat its own guidance if its services are fully restored during the quarter.

But what about the profits?

Momo's top-line growth is decelerating, but its adjusted gross margin expanded sequentially from 46% to 50.3% during the quarter, thanks to lower payouts to broadcasters and the lack of new investments in its Phanta City variety show.

Momo's adjusted operating margin (which excludes Tantan's financial impact) remained unchanged sequentially at 32%. The company is temporarily reducing its marketing expenses until its apps are restored, so those margins should hold steady in the second quarter. Momo's business model is less capital-intensive than online ad players like Baidu or SINA, which posted adjusted operating margins of 2% and 24%, respectively, last quarter.

On the bottom line, Momo's adjusted net income rose 1% annually to 910.3 million RMB ($136 million), or $0.62 per ADS -- which beat estimates by $0.08. It didn't offer any earnings guidance for the second quarter, but analysts anticipate about 9% growth for the quarter and 19% growth for the full year.

The valuations and verdict

That's a decent growth rate for a stock that trades at just eight times forward earnings. There's a lot of bad news already baked into Momo's stock -- including the trade war, app suspensions, and depreciation of the RMB -- but it could rebound quickly if those headwinds fade.

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Leo Sun owns shares of Apple, Baidu, and Sina. The Motley Fool owns shares of and recommends Apple and Baidu. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Momo and Sina. The Motley Fool has a disclosure policy.