Now Is the Time to Buy Momo Inc (ADR) Stock as it Heads for $50
Chinese social messaging app Momo Inc (ADR) (NASDAQ:MOMO) was left for dead in late 2017. Regulatory concerns hung over the stock as the company’s red-hot live video business looked susceptible to being hit hard by Chinese regulators. Consequently, MOMO stock dropped to $20 in late 2017.
At that point in time, MOMO was trading just north of 10-times forward earnings, a multiple that made no sense considering Momo’s huge revenue growth and broad exposure to China’s booming internet market.
Since then, the market has realized its mistake.
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Regulation fears have eased. Momo has reported robust earnings report after robust earnings report. And MOMO stock has rallied 100% to a far more reasonable valuation level of 20-times forward earnings.
But even at 20-times forward earnings, MOMO seems undervalued relative both to peers and intrinsic growth prospects. As such, I reasonably see it making a big move into the $50’s before cooling off.
Here’s a deeper look:
Momo Is on Fire Right Now
Revenue growth is running around 50-60%, with the biggest growth segment, Live Video Services, experiencing robust subscription growth and 70%-plus revenue growth. Monthly active user growth on Momo is also running in the 20%-plus range. Profit margins are slipping due to growth-related investments, but the 50-60% revenue growth is still powering 50%-plus profit growth.
This narrative is only getting stronger.
At its core, Momo is a social messaging platform that connects individuals through various chat methods. Momo is growing the platform’s use-cases to include group chatting, video, audio, original content and even dating (the company recently acquired Tantan, which is seen as China’s Tinder).
The growing number of use cases on Momo is having a positive affect on the company’s user growth, which in turn is sparking robust revenue growth. When revenue growth is robust, management can afford to invest big into the platform to keep revenue growth strong, while also not entirely killing margins.
Therefore, Momo is presently immersed in a positive feedback loop which results in robust user, revenue and profit growth.
This positive feedback loop will persist because Momo only has 100 million users. Peer social messaging app WeChat/Weixin has over 1 billion monthly active users. Momo likely won’t get to 1 billion users, but something around 200 million and up seems feasible considering the popularity of live-streaming and the heavy overlap of social media apps.
Momo Stock Is Still Undervalued
At current levels, MOMO isn’t priced for robust user, revenue, and profit growth to persist.
Revenues are presently growing in the 50-60% range. I don’t think this rate of growth will last that long. Laps will get harder, and growth rates will come down. But 20-25% revenue growth over the next five years seems feasible for this hyper-growth China internet company.
Net profit margins have consistently dropped over the past several years, from 32% to 28%. This compression will likely persist, as the company’s transition towards live-streaming requires heavy investment, which cuts into margins. But such investments will peel back with scale. Thus, in five years, I think it is likely that net profit margins shake out around 25%.
This combination of 20%-plus revenue growth and 25% net profit margins leads me to believe that Momo can net around $4.10 in earnings per share in five years. A market-average growth multiple of 20-times forward earnings on $4.10 implies a four-year forward price target of $82. Discounted back by 10% per year, that equates to a present value in the mid-$50’s.
Bottom Line on MOMO Stock
Momo stock is bouncing back from left-for-dead territory. While the stock is up 100% over the past several months, the current price still seems to undervalue the company’s robust growth prospects through China’s red-hot live-streaming, dating, and social messaging markets.
Consequently, I think this rally in Momo stock persists into the $50’s.
As of this writing, Luke Lango was long MOMO.
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