Company Overview
Momo Inc. (NASDAQ: MOMO) is the operator of Momo, a social networking platform for smartphones and tablets. Momo is one of the three largest social networks in China, with 91 million monthly active users. The Momo platform consists primarily of a mobile application, but includes a variety of other features and services for users, customers, and partners. The application allows users to establish relationships based on their location and interests, and facilitates sharing of different forms of interactive content. It is currently available on iOS, Android, and Windows systems.
Momo was first launched in 2011, and became a public company in 2014. It is headquartered in Beijing, China.
Products and Services
As noted above, Momo is largely a location-based social network that connects users based on interests. Users can create profile pages, send messages, and play single and multi-player games. The Momo application is free to download, and users are not required to purchase a subscription. However, the company does offer paid subscriptions that give users access to exclusive logos and icons, advanced search options, discounts at Momo’s virtual store, and the ability to see a list of recent visitors to their profile page.
In addition to subscriptions, Momo generates revenue from mobile games that are integrated into the platform. Games are generally created by third-parties, and revenues collected from in-game purchases and microtransactions are shared between the company and the developers. As of December 31, 2016, the company operated 19 non-exclusive licensed games, six exclusive licensed games, and six self-developed games. Going forward, the company intends to focus on self-developed games to highlight the strengths of the Momo platform.
Momo also offers a variety of marketing services to help businesses engage with its user base. In addition to traditional banner and text-based ads, local businesses can create profile pages that allow them to be discovered by nearby users via location-based searches. The company also plans to expand referral services to e-commerce companies, online marketplaces, or other content/service providers.
The company’s largest revenue driver is live streaming. The ‘Live Video’ function, launched in 2015, allows users to stream content such as singing, dancing, and talk shows, and to simultaneously interact with their audience. Users then purchase and send virtual gifts to the broadcasters, who receive a share of any revenue they generate.
The company’s net revenues for the past three years were distributed as follows:
Source: Company Filing
Market Overview
The global mobile internet market has grown significantly in the past several years. The total number of global mobile internet users was estimated at 1.9 billion in 2013, and that number is expected to reach 3.0 billion in 2017. Due to the increasing affordability of smartphones, this rapid growth is expected to occur in China as well. China’s mobile internet users are projected to grow from an estimated 556 million in 2013 to 712 million in 2017.
Recent Developments
On August 31, Goldman Sachs initiated coverage on Momo with a target price of $56 per share. At the time, this represented a 64 percent premium to the prevailing market price prior to the announcement. Analyst Fan Liu believes that the company’s innovative product offerings will expand the user base, grow active user time, and increase user stickiness.
Second Quarter Earnings Review
Total revenue for the quarter ended June 30, 2017, increased 215 percent year-over-year to $312 million. This rapid growth was attributable to the live video segment which increased revenues by more than $200 million from the same period one year ago. Momo also reported greater revenue across all other segments. However, its total paying users were roughly flat at 4.1 million.
Costs and expenses also increased significantly, 189 percent year-over-year to $246 million. This jump was primarily due to the fact that live video revenues are shared with broadcasters. The company also noted an increase in marketing and promotional expenses to attract users, an increase in personnel costs, an increase in fees paid to payment processors, and greater network infrastructure spending. Accordingly, net income totaled $60.8 million ($0.29 per ADS) in the second quarter of 2017, as compared to $15.4 million ($0.08 per ADS) in the same period one year ago.
At June 30, 2017, the company listed cash and equivalents equal to $846 million and no debt.
For the third quarter of 2017, the company expects net revenues between $337 million and $342 million, an increase of between 115 and 118 percent from the comparable period in 2016.
Stock Influences
- Changes in subscriber and active-user metrics;
- Changes in the company’s revenue mix
- Development of new monetization strategies; and
- M&A activity.
Risk Factors
- The company is highly dependent on retaining and growing its user base;
- The company is still in the early stages of monetization and it is uncertain if these strategies are sustainable;
- The company’s revenue and growth depend significantly on its live video service, and it may not able to maintain profitability; and
- The company is susceptible to negative publicity and negative developments could have a material impact on the company’s results.
Stock Performance
As of October 20, 2017, shares of Momo closed at $31.89, losing 2.8% on the day to yield a market capitalization of $6.5 billion. The stock had a strong run through July, and hit a high of $46.69 in early August. However, investors were spooked by second quarter earnings, and the shares have recently traded as low as $31, where the stock seems to have strong resistance.
Following are selected analyst ratings and price targets:
| Analyst | Firm | Rating | Price Target | Date |
| Tian X. Hou | TH Data Capital | Buy | $50.00 | 10/6/2017 |
| Sophie Huang | CMB International | Buy | $50.90 | 9/29/2017 |
| Jialong Shi | Nomura | Buy | $52.00 | 8/28/2017 |
Summary
With the recent success of its video streaming service, Momo appears to be entering a high-growth phase. However, investors are clearly concerned about the revenue concentration in the live video segment and the lack of growth in paying users. Despite posting impressive growth in revenues and net income, the stock fell heavily. Still, it seems that Momo intends to maintain a variety of revenue streams and not focus solely on video. As noted above, several analysts maintain lofty price targets.
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