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After Momo's Strong Earnings, Buy These Chinese Internet Stocks

Ryan McQueeney

Shares of Momo Inc. MOMO, the developer of a popular mobile social media application in China, soared more than 11% on Tuesday following the release of its strong fourth-quarter earnings results. With several other Chinese internet stocks showing strength, is now the time to invest in the country’s new digital age?

Momo Grows on Live Video

Momo is a location-based instant messaging and social media platform with more than 80 million monthly active users (MAUs). The application allows users to create individual profiles and connect with other people that are nearby. Americans might think of it as a mix between Tinder and Facebook FB.

For the fourth quarter, Momo reported adjusted earnings of 41 cents per share, beating the Zacks Consensus Estimate of 31 cents per share. Revenue rose 524% year-over-year to $246 million, smashing our consensus estimate of $190 million.

The big story for Momo was the impressive growth of its live video service, which launched back in the third quarter of 2015. The company said total paid subscribers to the service topped 3.5 million in the quarter; the segment is now Momo’s biggest revenue generator, bringing in $194.8 million in the latest period. Mobile gaming saw nice gains too, rising 45% to $11.3 million.

Momo said that it expects first-quarter revenues to be between $238 million and $243 million. That is well ahead of our current consensus estimate of $189 million.

Other Chinese Internet Stocks

As for now, Momo has a Zacks Rank #3 (Hold), but that could change based on its latest results. Interestingly enough, Momo’s success seems to be mirrored throughout its industry. In fact, several other Chinese internet stocks are currently sporting strong Zacks Ranks.

One company to note is Sina Corporation SINA. Sina spun off its popular microblogging network Weibo WB a few years ago, but the company’s core business still includes Sina.com, one of China’s most popular websites, as well as a Sina Sports, Sina Video, and Sina SAE, a growing cloud computing platform. The company currently has a Zacks Rank #2 (Buy).

Furthermore, if we are going to note Momo’s strong growth in mobile gaming, than we should also highlight Changyou.com CYOU, a leading operator of massively multiplayer online games (MMOs). Just last week, Changyou reported earnings that surpassed the Zacks Consensus Estimate by 26.23%, and since then, the company has seen two positive earnings estimate revisions. The stock currently sports a Zacks Rank #1 (Strong Buy).

Finally, it is only fitting to also put the spotlight on Chinese e-commerce giant Alibaba Group BABA. Originally skyrocketing to fame through its business-to-business distribution channels, Alibaba has grown to become one of the world’s largest retailers. The company is also growing its video, cloud computing, film production, and automotive segments.

In its most recent earnings report, Alibaba’s quarterly revenues soared 54% to $7.669 billion. The company’s cloud computing and digital media units grew 115% and 273%, respectively, and management touted to potential of its “New Retail” concept (also read: Alibaba's "New Retail" Concept Threatens Amazon's Global Dominance).

Bottom Line

In many ways, China’s internet economy mirrors that of the United States. The country’s major players are learning to adapt to, and invest in, the latest consumer trends. Social media, mobile gaming, cloud computing, and digital entertainment are driving the growth in this industry, and with a population of 1.3 billion, you can bet the demand is strong.

For investors interested in China, check out this exclusive interview from the Zacks Friday Finish Line team and Brendan Ahern of KraneShares, a leading provider of China-focused exchange-traded funds and Chinese investment education:

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