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Momo (MOMO) to Report Q4 Earnings: What's in the Cards?

Zacks Equity Research

Momo Inc. MOMO is set to report fourth-quarter 2018 results on March 12.

In the last reported quarter, the company’s earnings of 53 cents per share, which were in line with the Zacks Consensus Estimate, increased 17.8% year over year.  

Revenues also increased 52.1% year over year to $536 million. The top line was on par with the Zacks Consensus Estimate.

For the fourth quarter, the company expects revenues between RMB3,655 million and RMB3,7550 million, representing an increase of 43-47% on a year-over-year basis.

The Zacks Consensus Estimate for fourth-quarter earnings stands at 54 cents. The consensus mark for revenues is pegged at $540 million, up roughly 39.9% from the year-ago quarter.

Let’s see how things are shaping up for the upcoming announcement.

Momo Inc. Price and EPS Surprise

 

Momo Inc. Price and EPS Surprise | Momo Inc. Quote

Factors Likely to Influence Q4 Results

Momo is benefiting from an expanding user base and improving engagement level, driven by product innovations and improving marketing efficiency. This was evident from the fact that total paying users across the company’s platform increased 21.9% year over year to 8.9 million in the last reported quarter.  

In the last reported quarter, the company introduced a new game on its chat room platform to lure users. This helped in boosting overall usage and daily active user (DAU) penetration, which is a positive.

Moreover, Momo ramped up its efforts in cleaning spam accounts. This strategy is expected to have an unfavourable impact on user growth rate in the near term but will drive its top line in the long haul. Excluding the effect of the removal of spam accounts, the company recorded a sequential increase in user retention rate.

Moreover, value-added service revenues for the Momo app increased 221% on a year-over-year basis, driven by the addition of Tantan Limited along with strong demand for virtual gifting businesses, which is a positive.  

Growing momentum in Momo’s Quick Chat platforms’ usage is a tailwind and is expected to contribute to growth of VAS business in the to-be-reported quarter.

Robust growth of Tantan is expected to drive its top line in the to-be-reported quarter. Notably, in the last reported quarter, total paying subscribers reached $3.6 million, reflecting a sequential increase of $500,000. This increase in subscriber base is attributed to Tantan’s new monetization feature, which is expected to grow in the long haul.

However, management expects revenue growth from Tantan to decline sequentially in the fourth quarter, due to the inability of the company to launch any new monetisation feature.

Nonetheless, the momentum in live video business is expected to continue, courtesy of growing number of paid users and professional broadcasters. Notably, Live-video service revenues were $406.9 million, up 34.5% year over year, in the last reported quarter.

However, macro headwinds coupled with consumption softness are expected to put a negative pressure on the growth rate for live broadcasting business in the to-be-reported quarter.

Also, weakness in the mobile games business is a negative. The decline in revenues in the last reported quarter is due to stringent regulatory headwinds. Further, the World cup event resulted in the shift of the company’s major advertisers to other platforms. Notably, management expects the mobile marketing business to negatively impact its top line in the to-be-reported quarter.

Increasing operating expenses and investments for strengthening content system are expected to keep margins under pressure in the near term.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Currently, Momo has a Zacks Rank #2 and an Earnings ESP of +4.76%, which is indicative of a positive surprise in the quarter to be reported. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Other Stocks With Favorable Combination

Here are some other companies, which, per our model, also have the right combination of elements to post an earnings beat in their upcoming releases:

Canadian Solar Inc. CSIQ and Azul SA AZUL have an Earnings ESP of +81.43% and +8.33%, respectively. Both the stocks sport a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Tencent Holding Ltd. TCEHY has an Earnings ESP of +4.00% and a Zacks Rank #3.

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