“Zero-Covid policy” has been the poster child of China’s response to the global pandemic. Until early this month, under President Xi Jinping, the country maintained the world’s strictest Covid-testing regime for nearly three years, characterized by mass virus testing and strict lockdowns.

However, collateral damage to the economy and the consequent civil unrest compelled the country’s leadership to soften its stance on Covid restrictions. Despite the current surge in infections, China has scrapped all quarantine measures for Covid-19, including requirements for inbound visitors, both foreigners and Chinese nationals, from January 8, thereby putting an end to its “Zero-Covid policy.”

Sentiments have been further boosted by news of a rescue package for ailing Chinese developers to ease their liquidity strains and revive home purchases. More steps to stimulate economic growth and domestic consumption are expected to be in the pipeline as an outcome of the annual Central Economic Work Conference.

This bodes well for the Beijing-headquartered Hello Group Inc. (MOMO - Get Rating), which provides mobile-based online social and entertainment services. The company’s product portfolio includes two platforms: Momo and Tantan.

MOMO is a mobile application that connects people and facilitates social interactions based on location, interests, and various online recreational activities. On the other hand, Tantan, which was added through an acquisition in May 2018, is designed to help its users find and establish romantic connections and meet interesting people.

MOMO’s revenue increased at a 9.5% CAGR over the last five years. Moreover, Yan Tang, Chairman and CEO of MOMO, highlighted that the product and operational enhancements, coupled with the efforts to improve cost efficiency, allowed the company to see meaningful bottom-line improvement sequentially.

Let’s closely examine the factors that make it worthy of investment.

Impressive Price Action

MOMO’s stock is trading above its 50-day and 200-day moving averages of $7.17 and $5.54, respectively. It has gained 29.1% over the past month and 124.6% over the past six months to close the last trading session at $10.22.

Discounted Valuation

In terms of forward P/E, MOMO is currently trading at 8.13x, 51.9% lower than the industry average of 16.91x. The stock’s forward EV/Sales and EV/EBITDA multiples of 0.59 and 4.14 are 69.8% and 51.7% lower than the industry averages of 1.94 and 8.56, respectively.

Additionally, MOMO’s forward Price/Sales and Price/Book multiples of 1.09 and 1.25 are also 17.9% and 39.7% lower than the industry averages of 1.32 and 2.07, respectively.

Competitive Profitability

MOMO’s five-year average trailing 12-month gross profit margin of 46.81% compares to the industry average of 50.32%. The company’s five-year average trailing 12-month EBITDA and net income margins of 21.60% and 11.31% are higher than the industry averages of 18.95% and 4.51%, respectively.

Moreover, MOMO’s five-year average trailing 12-month ROCE, ROTC, and ROTA of 16.59%, 13.11%, and 8.54% also surpasses the industry averages of 5.81%, 3.83%, and 2.23%, respectively.

Optimistic Analyst Estimates

Analysts expect MOMO’s revenue and EPS for fiscal 2023 to increase 1.6% and 3.8% year-over-year to $1.84 billion and $1.30, respectively. Both metrics are expected to increase by a further 4.9% and 9.3% to $1.93 billion and $1.43, respectively. 

The company has also impressed by surpassing consensus EPS estimates in each of the trailing four quarters.

POWR Ratings Reflect Solid Prospects

MOMO has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its weighting.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MOMO has an A grade for Value and grade B for Quality, consistent with its discounted valuation and competitive profitability.

MOMO is ranked #8 of 43 stocks in the China group. Click here to access additional POWR Ratings for MOMO’s Growth, Momentum, Sentiment, and Stability.

Bottom Line

A decline in population and the slowest economic growth in decades are expected to spur the leadership into action to reinstate China as an engine for global consumption, production, and growth.

This is expected to act as a tailwind for MOMO. The stock’s profitability and attractive valuation make it worthy of a spot on your watchlist in 2023.

How Does Hello Group Inc. (MOMO) Stack up Against Its Peers?

MOMO has an overall POWR Rating of B, equating to a Buy rating. Check out its Chinese peers with an A (Strong Buy) rating: China Automotive Systems, Inc. (CAAS - Get Rating) and Tarena International, Inc. (TEDU - Get Rating).

MOMO shares were trading at $9.90 per share on Wednesday afternoon, down $0.32 (-3.13%). Year-to-date, MOMO has gained 10.24%, versus a 2.92% rise in the benchmark S&P 500 index during the same period.

About the Author: Santanu Roy

Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...

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