Why Momo Inc. Shares Rose 13% in March

MarketsMotley Fool

What happened

China-based social networking platform Momo Inc. (NASDAQ: MOMO) gained 13.1% in March, according to data from S&P Global Market Intelligence.

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So what

Momo shares jumped 9% on March 7 upon the release of fourth-quarter and full-year 2017 earnings. Keeping pace with its recent revenue trend, Momo's top line soared 57% against the fourth quarter of 2016, to $386.4 million. The company continued to benefit from growth in live video services, which, at $328.0 million, accounted for 85% of total revenue during the quarter. Investors were pleased that its paying live video user base, after hitting a plateau in the first three quarters of 2017, resumed growth last quarter, expanding from 4.1 million users to a quarter-end tally of 4.3 million.

As I explained earlier this year, "cost of revenue," a line item on Momo's income statement that directly tracks user acquisitions costs, has typically tracked around 45% of revenue. In recent months, this number has increased as Momo spends more to acquire new users. As in the previous sequential quarter (third quarter of 2017), cost of revenue ticked up to comprise over 50% of revenue in Q4 2017, to $200.2 million. Yet a more constrained rise in other operating expenses muted this effect, and given the healthy sales increase, operating income rose 17%, to $107.0 million, against the comparable fourth quarter of 2016.

During March, shares also continued to benefit from Momo's announcement in late February that it's acquiring privately held Chinese social and dating app provider Tantan. Momo will pay $600.9 million in cash and fork over 5.3 million newly issued Class A ordinary shares in the transaction, which is anticipated to close in the second quarter of 2018. Purchasing Tantan expands revenue streams in Momo's social dating niche, and should help fortify the company against robust competition from the likes of Weibo and YY.

Now what

Momo doesn't offer much in the way of forward guidance, but the company does forecast quarterly sales estimates for investors. For the first quarter of 2018, it expects revenue of between $387.0 million and $402.0 million, which at the midpoint, would represent a year-over-year increase of roughly 50%. At least for the present, Momo is still generating top-line growth at a breakneck pace.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends Momo and Weibo. The Motley Fool has a disclosure policy.