Shares of Momo (NASDAQ: MOMO) are down over 20% this week after the Chinese social media company reported its third-quarter earnings. That decline is surprising, given Momo easily beat top-and bottom-line estimates.
Revenue rose 126% annually to $354.5 million, beating expectations by $15 million. Its non-GAAP net income rose 89% to $93.8 million, or $0.45 per share, surpassing expectations by $0.07. Its GAAP net income roughly doubled to $79.1 million.
Momo's mobile app. Image source: Google Play.
Moreover, Momo still trades at about 13 times forward earnings estimates -- making the stock look like a deeply undervalued growth play on the red-hot Chinese tech market. So why were investors so eager to sell the stock, which remains up nearly 40% for the year, even after its recent drop? Let's take a closer look at the good and bad news from the quarterly report to decide.
First, the good news ...
During the quarter, Momo's live video revenue rose 179% annually to $302.6 million, as its value-added service revenue rose 45% to $26.3 million. Revenue from mobile marketing, mobile games, and other services (a combined 7% of sales) all declined, but the company is intentionally pivoting away from those legacy businesses to focus on its live-streaming platform.
Monthly active users (MAUs) grew 22% to 94.4 million. Average revenue per paying user also increased, thanks to the introduction of new virtual gifts and value-added services. Paid users of its value-added services climbed 41% to 4.8 million, while paid live video users grew 58% to 4.1 million.
Momo finished the quarter with $949.7 million in cash and equivalents -- that strong cash position should give the company plenty of flexibility to invest in new initiatives like "Momo 8.0", which adds new chat experiences, a "discovery" page for browsing user profiles, and faster ad delivery to the platform.
Now, the bad news ...
The bad news is that Momo's 126% sales growth during the quarter marked its slowest growth in six quarters. Its guidance for 50% to 56% growth to close out the year also strongly indicates that its growth has peaked.
That slowdown is worrisome, because much of Momo's triple-digit growth was driven by the introduction of its live video platform in early 2017. Prior to that shift, Momo was usually dubbed "China's Tinder" due to its reputation as a location-based dating app.
Image source: Getty Images.
Looking ahead, the live video business faces an uncertain future, as the market is crowded with similar apps from YY, Weibo, Yingke, and Xiandanjia. Many of these rivals are either growing at faster or more sustainable rates than Momo. YY, for example, reported its highest revenue growth rate in seven quarters in mid-November.