Jan 28 2020 - Momo: Don't Need To Wait For Another Date

Summary

Core Momo is incredibly cash-generative and is still showing strong and steady growth.

Tantan has recovered strongly after its suspension and is now back to showing a strong growth streak.

Excluding Momo's strong cash position and Tantan, core Momo trades at a 6x P/E ratio.

If you still need to add Momo (MOMO) to your portfolio, now seems to be a great time. For most of 2019, Momo has stayed above , but now the stock has corrected substantially after the recent coronavirus scare, dropping from above to below in a matter of days. The funny thing is, most of Momo's revenue actually comes from live-streaming, which should actually benefit from more people staying at home. All this means that we believe this steep decline is a good opportunity to get a fast-growing and profitable company at a great price.

Continued strong profitability for core Momo

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(Source: Google Images)

Core Momo is an absolutely great business. It not only shows steady growth of around 24% every quarter, but also generates a substantial amount of cash, more than enough to cover Tantan's losses. This year, core Momo has already generated earnings at an annualized rate of around US0 million.

There has been a lot of speculation that core Momo, which mainly generates revenues from live-streaming, would be hurt by new short-form video apps like Douyin and Kuaishou that are using live-streaming as a monetization stream. However, the company's live video revenue stream has continued to grow at a mid-teens pace, and management believes there is little systemic risk to its ecosystem.

As we understand, some of the investors are concerned about the competitive landscape in the live streaming space, mainly due to the rapid -- rapidly rising revenues from some other players with larger user base. At this point, we have not seen any meaningful competitive pressure from these players or any systemic risk to our ecosystem posted by the competitors out there in the market. The revenue and profit performance of our live broadcasting business speaks for itself.

Source: Q3 2019 call

Tantan

49762912-1580182092282472.png

(Source: Google Images)

Last time we discussed Momo and Tantan, we predicted that the ban would have little to no effect on Tantan's long-term fundamentals. Well, this turned out to be true, as all user metrics have quickly rebounded after the ban expired in June.

Tantan's download and payment service had been fully restored by mid July, since then we've started to see a strong rebound in all the core metrics, including the number of active users, paying subscribers, as well as the daily grossing. By August 25th, the paying users already went back to 4.1 million.

Source: Q2 2019 call

The strong growth of Tantan continued in Q3, with paying users hitting 4.5 million, up 25% from last year, as the company stepped up marketing efforts. It continues to be one of the most popular dating methods in China.

49762912-15800176211344347.png

(Source: Momo earnings calls)

It's not just China that Tantan is successful in, however. The app has also made strong headway into India, becoming the country's 5th-largest dating app.

49762912-1580017516280854.png

(Source: Quartz)

Management sees substantial potential for Tantan in international markets, and considering Match Group's (MTCH) international revenue already makes up around 50% of revenue, we have to say we agree with them. So far, 10% of Tantan's revenue comes outside of China, and management believes Tantan's product has universal appeal, so there is definitely substantial room to grow from here.

In terms of users, we now have pretty established position in India and some of the markets in Southeast Asia. As we started to focus more on improving monetization, revenue also began to catch up in these markets in Q3. For the month of October overseas market already contributed more than 10% of total revenue.

Our observations in the various markets so far entered also reinforce our early belief that Tantan products have universal appeal to a global user base and the revenue TAM outside of China can be as big as what we've seen in domestic market.

Source: Q3 2019 call

While Tantan is generating substantial losses at the moment, we believe it is in a growth phase and will be able to generate substantial profits at maturity, especially considering competitor Match Group generates over 30% operating margins at the moment.

Coronavirus could be a tailwind

Although Momo stock has dropped substantially after the coronavirus health scare, it may actually benefit from this. Admittedly, there would likely be fewer people who would date or meet up in China, but there would also be a substantial amount of people who have nothing to do at home and would likely watch a live stream to entertain themselves, so honestly, we don't see why this health scare would cause Momo to drop so much.

Valuation

If you exclude the purchase cost of Tantan and the cash and deposits on the balance sheet, which total around .7 billion, the EV of the core Momo business is only around .6 billion, representing a 6x P/E multiple for a company that is growing 20% a year.

We also believe Tantan has the potential to become a much more valuable company, considering it is growing at over 50% despite headwinds from its suspension recently and considering it generates over 0 million in revenue annualized. The company is estimated to reach breakeven in 2020 and generate strong profits afterward.

Overall, even if you remove cash and cash equivalents and Tantan, we believe Momo is fairly valued. If you include these, the company is undervalued by around 50% at its current valuation.

Takeaway

Overall, Momo has always been cheap, but after the recent Wuhan scare crisis, the stock has fallen to ridiculous levels. The core Momo business, which generates substantial cash and is growing at a steady pace, is trading at just 6x P/E. The Tantan business has strong growth potential, and we believe it could be worth much more than the buying price.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MOMO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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