Chinese social media company Momo (MOMO) had seen its stock surge more than 100% between January and the end of June, before plummeting over the past few months to a 52-week low. While the company has proved it’s capable of massive growth, investors seem to require only surging growth and are especially concerned with the acceleration of their growth rates. But so far this year, growth has been decelerating; while revenue grew by 64% year-over-year in 1Q18, growth decelerated to 58% in 2Q18 and then 51% in 3Q18.
Momo’s flagship service is Tantan, a dating application similar to Tinder in the US. Through the app’s new “See who likes you” feature – which was released in the third quarter – and new features set to be released in 2019, Shi says Tantan has “shown huge monetisation potential,” and has already seen surging revenue from the update. The analyst expects operating loss margin to continue narrowing over the next year, primarily due to revenue growth outpacing sales and marketing expenses, its two key operating expenses.
While Tantan is proving to be a strong business for Momo, the company is facing challenges in its live streaming business. Revenue grew 34% in 3Q19 (year-over-year), which is down significantly from 66% growth in 1H18. The analyst says he “learned from industry contacts that quite a few of the high-spending audiences, many of whom are linked to or run small businesses, have become more reluctant to gift hosts as much as they did before, likely due to the macro weakness which has hit their businesses.” As a result of weaker macro conditions, Momo has an adjusted KPIs to favour revenue more than content and seeks to improve monetisation of audiences.
Wall Street is very bullish on the Chinese social media stock. TipRanks analytics show Momo as a Strong Buy, with four analysts recommending Buy and one analyst recommending hold. The 12-month average price target stands at $40.80, marking a 67% upside from the stock’s current price. (See Momo’s price targets and analyst ratings on TipRanks)