Why Chinese social network Momo might be a good pick for value investors

Besides Alibaba and Tencent, what other Chinese stocks you should also own?

China’s Momo Inc, a mobile-based social networking and entertainment platform which offers mobile games, paid emoticons and mobile marketing services, is likely to be a strong stock pick over the medium and long term, given its performance and the growing nature of China’s regulated social media market.

China is the world’s largest social network market but is affected by the country’s censorship program, which means that leading international players like Facebook, Twitter and other alternative are inaccessible hence unable to build traction among Chinese consumers.

This has led to the rise of comparable platforms of Chinese origin such as Tencent’s WeChat and QQ, as well as Alibaba’s Weibo. Since Chinese characters can transmit more content than a single English word, microblogging services have gained strong traction in China.

Information from consumer intelligence firm Statista indicates that in 2018, China has an estimated 616.5 million social network users in China, which will grow to 725 million by 2022.

Estimated number of Chinese social media users. Credit: Statista

Momo, which conducted its public float on the Nasdaq in December 2014, raised $216m through the public offer. At the time, social messaging services were drawing considerable interest worldwide; Facebook Inc paid $19b for Whatsapp while Japanese online retailer Rakuten Inc bought Viber for $900m.

At the time of its public offer, Momo claimed to be the third largest instant messaging app in China and was labelled China’s version of dating app Tinder, due to its users utilising the location-based social network it offered to browse through profiles of people available for casual dates.

However, it reduced its focus on this feature following criticism from state-run media in China – it was alleged that this encouraged prostitution – the company expanded into general social-media services. Now it offers chatrooms, karaoke, social groups, social mobile games, and other games.

Growth prospects

Its Q2 2018 financial results saw it post revenue growth of 58.3% YoY to $494.27m – beating analysts’ forecasts by $14.5M or 3% – and updated revenue guidance to $540m from $525m.

Additionally, its Monthly Active Users (MAU) grew to 108 million in June 2018, compared to 91.3 million in June 2017, an increase of 18% YoY and a 4.5% increase, or 4.7 million more users, over its Q1 2018 results.

It also reported that users were spending more time on the app, growing by 11% YOY.

In March 2018, Momo acquired Tantan, the Chinese version of Tinder. The acquisition is strategic, as Tantan is the largest online dating app in China, with an estimated 20 million users, followed by Momo. By comparison, Tinder reports it has an estimated 50 million users, of which 10 million are daily active users.

Lifetime performance of Momo Inc. share price.

This highlights the growth potential of Tantan in China’s online dating space which has been driven by the evolving nature of dating in China, despite regulatory friction from Beijing.

In the course of the Q2 earnings call, Yan Tang, Chairman and CEO of Momo, said,”I am glad that we delivered another solid quarter. Our community continued to grow with healthy engagement trends, thanks to our consistent endeavours to drive product innovation and content enrichment.”

“Our live streaming business continued to grow robustly.  In addition, value-added service revenues for the Momo app more than doubled from a year ago, demonstrating Momo’s monetization potential as a social platform. Tantan officially joined our family in the second quarter of 2018 and started to contribute to our social ecosystem and topline growth. Together we will be pushing forward our strategic priorities and solidifying our leadership in China’s open social territory.”

As at August 2018, Tantan launched in India, where it competes with services like Woo and Tinder. Commenting on its launch in India, a spokesperson for Tantan explained: “We did a soft launch in June, and we plan to pursue Indian market aggressively.  The soft launch has provided us with a runway to build further on. Our journey so far has reaped promising results for us, as young people in India are increasingly looking for outlets (like ours).”

“Having said that, there is no doubt that this is a competitive space. We are trying to offer a unique proposition: Tantan’s focus is directed towards building a community, where we control the use of fake pictures, spammers, and every sort of harassment, with the use of technology and manual filtering.”

The company claims to have remedied the issue of fake profiles, which negatively impact other online dating services and reduces trust in the brand.

Conclusion

The last few years have seen it outperform the Nasdaq-100 and Nasdaq Composite indices, with a steady increase in its share price over the last few years. Moreover, it seems relatively unaffected by current China-US trade tensions. Moreover, the company still has room to expand in China’s Tier 2 and Tier 3 cities.

Momo’s shares have outperformed the Nasdaq-100 Index and Nasdaq Composite Index. Credit: WSJ

An analyst on SeekingAlpha believes that “Momo has a long-term trend to support the growth of its business for years to come” for several reasons. Firstly in China mobile where mobile rules, Momo uses AI to pair users, another one of those trends to enhance stickiness in addition to getting data. And secondly, Momo’s live video broadcasting business sits at the centre of the current trend.

With steadfastly growing metrics and a diversified business that rides on the wave of the trend, and given its current underappreciation, Momo could be a good pick for value investors.

 

Editor: Ben Jiang