When a company posts revenue growth of 51%, investors usually go into a buying frenzy. But when Momo (NASDAQ:MOMO) pulled this off in its third quarter, Wall Street didn’t rush to gobble up MOMO stock. In fact, MOMO stock plunged by 15% on the news, and the shares actually came close to hitting a 52-week low.
Of course, when it comes to hyper-growth companies, even slight decelerations can have an out-sized impact on their valuation. And that was certainly the case with Momo Inc stock.
Often referred to as the “Tinder of China,” Momo was expected to report top-line growth of 51%-55%. MOMO also provided less-then-stellar guidance. The company said that its revenue growth would range from 43%-47% in Q4.
Despite all this, MOMO stock has proved to be resilient. Since the December low, the shares have jumped 37% to $33. Part of its surge was due to an overall rally of Chinese stocks, which also lifted Alibaba (NYSE:BABA), Tencent Holdings (NASDAQOTH:TCEHY) and JD.com (NASDAQ:JD).
But perhaps the main driver of the advance of MOMO stock is that MOMO is a solid company. In a relatively short period of time, MOMO, founded in 2011, has been able to build a rich platform. The company’s main app, which is available on Apple’s (NASDAQ:AAPL) iOS and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Android, allows people to connect with each other using features like Nearby Users and Nearby Events. It’s also easy to send multi-media messages and play social games within the app.
All in all, these features have helped lead to better dating matches. They also have created a network effect, which has been key to the growth of the company’s user base. Note that its MAUs (Monthly Active Users) reached about 110.5 million as of the end of September, up from 94.4 million from the same time a year earlier. For early-stage social platforms, it can be tough to keep growing, as Snap (NASDAQ:SNAP) has shown. But MOMO doesn’t seem to have a problem in that area.
The company has also been adept at getting its users to pay for premium services. The total number of subscribers to the live video and valued-added services (such as virtual gifts) segment was 12.5 million, up from 7.3 million in Q3 of 2017. While 3.6 million of the segment’s new users came from an acquisition, its growth was still impressive.
But MOMO has its issues. Its ad revenues have been soft, and its mobile-gaming business has been under lots of pressure, due to intense competition from mega operators like Tencent. But for MOMO, these businesses are relatively small.
More importantly, the company’s margins have been under some pressure. That’s partially because, in order to keep up its torrid growth, the company has been ramping up its spending on marketing, R&D and infrastructure.
The Bottom Line on MOMO Stock
MOMO continues to generate hefty cash flows, which came to $50.9 million in Q4, and MOMO has $1.5 billion in the bank. So the company has the resources to make further M&A deals. Keep in mind that M&A has been crucial for Match Group (NASDAQ:MTCH). In other words, it would not be surprising to see MOMO acquire more companies.
Meanwhile, MOMO stock is trading at dirt-cheap levels. Consider that the forward price-earnings ratio of Momo Inc stock is a mere 11.8, which is a steep discount to its growth rate. Granted, MOMO will continue to be volatile, which is normal for fast-growing companies. But for investors with a long-term focus, MOMO stock remains at a very attractive entry point.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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