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Momo Beats the Street as Live Streaming Continues to Boom

- By Soid Ahmad

Momo Inc. (MOMO) - one of China's leading online streaming platforms - posted results for its second quarter before the opening bell on Wednesday, beating expectations.

Revenue blew past expectations to reach $494 million, up 58.3% from the prior-year quarter. The do-it-yourself live streaming platform posted non-GAAP earnings of 66 cents per share, ahead of the analysts' consensus of 59 cents. Momo now serves 108 million monthly active users, including 11.8 million paying users for its live video and value-added services.


For the third quarter, Momo is guiding for midpoint revenue of $531.5 million, ahead of Wall Street's consensus of $517.3 million. The market welcomed the news, sending the stock up about 7%.

What does Momo do?

Momo primarily serves China's booming live streaming market. Its mobile app allows users to broadcast live videos and create and share short videos. The company is also involved in providing other social interaction features, including voice, pictures, discovery of nearby people based on geographic location and common interest group creation. While Momo is more focused on mobile audience, it also hosts a web-based live streaming platform. The company owns multiple domains, including immomo.com, wemomo.com and immomogame.com.

What drove performance?

Live streaming was the highlight of quarter, contributing 83% of Momo's total revenue. Value-added services, including premium memberships and in-app virtual gifts, was the fastest-growing segment with revenue increasing 124% year over year. Revenue from mobile marketing increased 17%, while mobile gaming registered a 40% year-over-year decline.



In short, Momo witnessed fabulous growth during the quarter thanks to increasing adoption of live streaming and in-app purchasing trends.

Momo or YY?

Live streaming is a promising market, especially in China. There are two key players in this arena, Momo and YY Inc. (YY), which begs the question: which is a better investment prospect?

Both players are enjoying high double-digit top-line growth alongside maintaining a strong position in terms of monthly active users. Although it's a hard decision, several metrics set them apart.

Monthly active users: Momo

While YY leads the market in terms of overall monthly active users, Momo has the lead where it matters - the mobile market. As of the end of June, Momo had 108 million monthly active users on its mobile platform, compared to YY's 80 million active users. As mobile platforms are gaining the lead over conventional web-based platforms, Momo has an advantage over YY in terms of users.

Market share: YY

YY commands the market share despite its relatively smaller mobile user base. The company generated $538 million from live streaming during the second quarter, while Momo failed to cross the $500 million mark. YY's revenue guidance for the third quarter is also higher, which means it is stronger in terms of revenue generation. Assuming Momo generates all of its revenue from mobile users, it's behind YY in mobile average revenue per user.



(Note:Calculation is based on live-video revenue of Momo and mobile live streaming revenue of YY for the second quarter of 2018.)

The chart shows YY is slightly ahead of Momo in average revenue per user. It's important to note that Momo's ARPU also includes web-based streaming revenue, meaning ARPU will be lower if only mobile platform revenue is included.

Top-line growth: Momo

As far as revenue growth is concerned, Momo is ahead. The company posted revenue growth of 58% for the quarter while YY's revenue increased 44%. For the third quarter, Momo is targeting 7% sequential growth while YY is expecting 3% year-over-year growth. Moreover, analysts are expecting Momo's earnings to grow 27% per annum over the next five years. The five-year growth forecast for YY is around 20% per year.

Relative valuation: YY

One of the striking differences between YY and Momo is how the market is pricing these companies. Momo is trading at a forward price-earnings ratio of 8.8 while Momo is priced at 13.7 times forward earnings.

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The chart shows that while YY was trading at a higher multiple in the past, Momo has taken the lead recently. On sales basis, Momo is also expensive. The stock is trading with a forward price-sales ratio of 4.1. YY trades with a forward price-sales ratio of 2.1.

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The market is clearly assigning a premium to Momo due to higher growth expectations. Regardless, the price-earnings to growth ratio - which tracks valuation relative to growth - indicates Momo is expensive compared to YY. Momo is trading at a forward PEG ratio of 0.51 while YY's valuation supports a PEG of 0.44. In short, YY is relatively cheaper.

EVA valuation: YY

The economic value added valuation reveals YY offers more upside compared to Momo. Assuming 20% per-year earnings growth for Momo between 2020 and 2024 and 1% growth in perpetuity, the price target is around $68, a 58% upside to Wednesday's opening price.

Inputs for Valuation - Momo Inc

EPS 2018

$2.51

EPS 2019

$3.17

Cost of Equity (Required Return)

7.50%

Invested Capital (mil)

$1,034.9

Outstanding shares (mil)

203.7

5-year earnings growth

20%

Terminal growth

1.00%

Outstanding shares adjusted for share-based compensation expense

227.6



(Note: Outstanding shares are adjusted for stock compensation expenses by increasing the number of outstanding shares by around 24 million, which equates to a lifetime of stock-based compensation expenses of over $1 billion, assuming no growth in expenses.)

Projections

2018

2019

2020

2021

2022

Perpetuity

Notes

Dollars in million

Net Income

511.29

645.74

774.88

929.86

1115.83

1339.00

Cost of capital

r*capital invested

77.62

110.14

150.31

197.16

252.11

316.89

Economic Value Added

433.67

535.59

624.57

732.70

863.72

1022.11

Discount factor

1.00

0.93

0.87

0.80

0.75

11.52

Discounted EVA

433.67

498.23

540.46

589.80

646.76

11774.71

Market value added

14484

Invested Capital

1035

Value of the equity

15519

Perpetual Growth in Residual Earnings

3.8%

Price Target

$68.2



For YY, there's even more upside to the stock given comparable growth assumptions. Assuming YY manages to post earnings growth of 16% per year between 2020 and 2024 and 1% terminal growth, the stock offers an upside of more than 90% according to the EVA valuation.

Inputs for Valuation - YY Inc.

EPS 2018

$7.45

EPS 2019

$9.17

Cost of Equity (Required Return)

7.50%

Invested Capital (mil)

$1,591

Outstanding shares (mil)

64.7

5-year earnings growth

16%

Terminal growth

1.00%

Outstanding shares adjusted for share-based compensation expense

85



(Note: Outstanding shares are adjusted for stock compensation expenses by increasing the number of outstanding shares by around 20.3 million, which equates to a lifetime of stock-based compensation expenses of over $1.5 billion, assuming no growth in expenses.)

Projections

2018

2019

2020

2021

2022

Perpetuity

Notes

Dollars in million

Net Income

482.02

593.30

688.23

798.34

926.08

1074.25

Cost of Capital

r*capital invested

119.33

146.53

180.03

218.15

261.66

311.49

Economic Value Added

362.69

446.77

508.19

580.19

664.41

762.76

Discount factor

1.00

0.93

0.87

0.80

0.75

11.52

Discounted EVA

362.69

415.60

439.76

467.03

497.51

8786.95

Market value added

10970

Invested Capital

1591

Value of the equity

12561

Perpetual Growth in Residual Earnings

3.4%

Price Target

$147.8



From an economic value vantage point, YY offers more upside.

Takeaways

Momo posted stellar growth during the quarter, beating competitor YY. The company also caters to the needs of more mobile active users.

On the other hand, YY is generating more revenue per user, trades at cheaper valuation and holds the largest market share in the live streaming market.

Although both companies are good bets, YY offers more value than Momo.

This article first appeared on GuruFocus.