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small-cap

Exit This Chinese Online Social Networking and Entertainment Stock - MOMO

Mar 17, 2022 | Team Kalkine
Exit This Chinese Online Social Networking and Entertainment Stock - MOMO

 

Hello Group Inc.

Hello Group Inc. (NASDAQ: MOMO) is a major Chinese online social networking and entertainment company. Momo, Tantan, and other MOMO platform products can help people develop new friendships, social connections, and meaningful conversations. The company's main revenue streams are live streaming, value-added, mobile marketing, online gaming, and other services. MOMO had 196.95 million American Depository Shares (ADS) listed and outstanding (each ADS representing two Class A ordinary shares).

Why should Investors make an Exit?

  • Fall in Fundaments: Due to structural reforms in the company's core live video business and a dip in Tantan's live streaming income due to a strategic shift, total net revenues fell to RMB 3.76 billion in Q3FY21 (ended September 30, 2021) from RMB 3.77 billion in Q3FY20. In addition, MOMO's net income (attributable to common shareholders) for the third quarter of FY21 was RMB 403.19 million, down 11.72% from RMB 456.73 million in the previous quarter.
  • Political and Regulatory Risk: The Chinese authorities' crackdown on its US-listed businesses and the consequent possibility of stricter rules could dent the company's operations. This is after the passage of a bill in the US, which could lead to the delisting of some Chinese companies from the country's exchanges (in case the US authorities cannot satisfactorily audit the company for three consecutive years). These constitute significant political and regulatory risks for the firm.
  • Fall in Paying Users: In the third quarter of 2021, total paying users of live video and value-added services were 12.2 million, compared to 13.1 million in the third quarter of 2020, including 4.1 million paying Tantan users.
  • Diminishing Outlook: MOMO expects Q4FY21 sales to be between RMB 3.60 and 3.75 billion, a drop of 5.1 to 1.2% YoY, according to its Q3FY21 press release. This prediction, which is subject to change, includes the company's current and preliminary opinions on the market and operating conditions.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

MOMO's stock price has been volatile throughout the year and has fallen 54.95% in the past twelve months, and is currently leaning towards the lower end of its 52-week range of USD 4.47 to USD 16.64. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 6.28.

Considering the current trading levels, weakening future expectation, fall in paying customers, drop-in topline and bottom-line, current valuation, and associated risks, we recommend a "Sell" rating on the stock at the closing price of USD 7.27, up 51.46%, as of March 16, 2022.

1-Year Technical Price Chart (as of March 16, 2022). Source: REFINITIV, Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.