On the morning of August 22, Momo, one of the Chinese online social media companies, reported Q2:17 earnings of $0.35 per share on revenues of $312 million. Wall Street had been expecting earnings of $0.31 per share on revenues of $286 million going into the reporting event. The company said that its average monthly user count in Q2 ended at 91.3 million versus 74.8 million in Q2 of 2016.
Shares of the company were down 10% in the pre-market reaction that morning but worse was yet to come once the market opened. By the time the day closed for trading, shares of Momo closed the regular market session lower by 20% at $36.02 per share.
It almost seemed that investors were in a panic to sell as fast as they could without even a single thought to the company's raised guidance for the September quarter. For Q3, Momo guided revenues to a range of $337 million and $342 million (round off to $339 million) versus then-consensus of $$307 million for the quarter. Also ignored was the better than expected average revenue per user (ARPU) reported by the company for Q2.
A primary reason for the sell-off could have been the fact that shares had almost tripled for 2017 going into the Q2 earnings print and not only were investor expectations sky-high, they were almost impossible to beat, let alone exceed.
One of the secondary reasons for the sell-off was probably the erroneous hypothesis that the company's live video usage has peaked and going forward growth rates will be modest at best. This was more than likely floated by the always-short-never-wrong gurus/swamis/pundits and do-over-Dudleys.
Video is Momo's primary driver of revenue growth (80% of revenues from the segment in Q2:17) and a slowdown in that segment would be problematic, to say the least.
For 2018, the Street expects Momo to grow revenues by 35% to $1.74 billion and earnings by 52% to $2.30 per share.
At Momo's current price of $31.97 per share, the company is valued at roughly 14x estimated earnings for 2018.
After the Q2 related haircut, shares of Momo are down about 30% from the August peak.
Thus far, there has not been much consolidation among the Chinese e-commerce companies. I think that will change come the second half of 2018 and beyond.
The Big 3 of China could soon start using their market cap related currency to take out the smaller Chinese e-commerce companies as saturation begins in the various online sectors within China.
Although waiting and hoping for a takeover does not an investment thesis make, the current undervaluation of Momo presents an attractive investment opportunity for astute investors.
On the flip-side, the naysayers will be loud and be getting louder still as the Chinese sector continues to shine and present attractive investment opportunities going forward despite the stellar returns thus far in 2017. The negative channel checks and trend check reports/chatter will not cease and desist any time soon either.
However, investors should not be wantonly long and strong but should instead be cautiously long and strong.
My fair value for Momo shares is at least $40 per shares which does not take into account the almost $5 per share the company has in cash.
Shares of Momo closed on October 6, 2017 at $31.97.