Tread Lightly With Momo Stock Despite Its 50% Jump to Start 2019

2019 has so far been an incredibly profitable one for Momo (NASDAQ: MOMO) shareholders. After the Chinese social media company reported a better-than-expected end to its 2018 fiscal year, its stock has been up 50% since the start of 2019 -- reversing the steep drop during the second half of last year.

Growth is expected to decelerate, though. If that trend continues, the stock's recent run might hit a wall later on this year.

First, a full-year recap

The number of new users signing up to the Momo social and dating platform (which it fast-tracked when it purchased leading Chinese matchmaking company Tantan last year) continues to slow. At the end of the year, the company reported 113.3 million monthly active users, up from 99.1 million at the end of 2017.

However, paying subscribers are increasing at a faster pace. There were 13.0 million at the end of the year, compared with 7.8 million at the close of 2017 and 12.5 million at the end of Momo's third quarter.

Earnings also notched a big increase last year, albeit at a slower pace than the top line. The reason is that Momo continues to invest back into itself to build out the social services it offers, especially those around dating and matchmaking video services and relationship recommendation algorithms. Momo's top team admits its capabilities are still very simple, and making continuous improvements will help revenue keep growing.

Nevertheless, 2018 was an undeniably good year, but there is reason for pause.

What's the problem?

No one is going to complain about double digits, especially a revenue metric that went up 48% in a year. Nevertheless, that figure is slowing in dramatic fashion. After posting a 138% increase in revenue in 2017, Momo has been slowing quickly and forecasts another deceleration for its first quarter of 2019.

Period YOY Revenue Growth
Q1 2018 64%
Q2 2018 58%
Q3 2018 51%
Q4 2018 45%*
Q1 2019 (forecast) 28% to 32%

Again, double-digit expansion is nothing to be worried about, but Momo's trajectory is flattening quickly. With expense growth still exceeding that of revenue, shareholders should brace themselves for an even bigger slowdown in earnings. And after the 50% rebound for the stock in the last couple of months, shares aren't the hot deal they were. Trailing-12-month and 12-month forward price to earnings (P/E) are 19 and 13, respectively, compared to 14 and 10 just a short while ago, the last time I wrote about Momo.

Granted, those valuations don't make Momo an expensive stock -- as long as it can continue to post strong user additions and find ways to monetize those users in new ways. However, investors looking to pick up shares for the first time should exercise some caution here. If Momo's top line keeps the brakes applied, the stock could be in for another correction later on in 2019.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Momo. The Motley Fool has a disclosure policy.