Hello Group (MOMO, Financial) recently surged to the #2 position on our Value Leaders Rankings. The stock had plummeted to one-year lows after a disappointing Q1 report but has since rebounded by over 25%.
Despite the recent gains, MOMO still trades at attractive multiples: 6.1x forward earnings, 1.3x EV to EBITDA, and a 21% free cash flow yield. Although the stock is trading at half its value from a year ago, there are positive signs in the company's Q1 report that could drive future appreciation.
- What is MOMO?
MOMO is a China-based company operating three main businesses: the Momo social media app, the Tantan dating app, and several standalone global apps. The Momo app, which contributes nearly all profits and 75% of revenue, offers features like live streaming and location-based social interactions.
- Why did Q1 trigger a sharp pullback?
Revenue contracted due to weak macroeconomic conditions affecting consumer sentiment. MOMO also reduced revenue-oriented competition events in live streaming to limit unhealthy monetization. Seasonal factors from the Chinese New Year further impacted revenue.
- MOMO's strategic actions for long-term growth
MOMO is focusing on improving efficiency across its businesses. These efforts led to Q1 costs falling faster than revenue, resulting in year-over-year margin expansion.
- Encouraging developments in Q1
MOMO has been enhancing its core app with AI technology and new interactive features, driving organic revenue growth. Tantan's user base began recovering in March as external headwinds eased. MOMO is also increasing marketing and innovation efforts for Tantan.
- The company is expanding into new markets, which may pressure short-term profitability but should support long-term growth.
MOMO's performance this year has been lackluster, with a disappointing Q4 report in March leading to extended selling pressure. However, management has been quick to address weaknesses, optimizing costs and focusing on user and revenue growth. While macroeconomic challenges persist, MOMO is taking steps to enhance profitability and build a stronger foundation for future growth. A 15-20% stop loss is recommended.
