China’s mobile-based social and entertainment services provider, Hello Group Inc. (MOMO), reported its fiscal first-quarter results last month, on May 28, 2024. The company failed to beat the consensus EPS estimate, but its revenue exceeded Wall Street estimates. In this piece, I have discussed why it could be wise to hold the stock now.

In the three-month period that ended March 31, 2024, MOMO reported total revenue of RMB2.56 billion ($352.78 million), down 9.2% year-over-year but well above the analyst estimate of $342.87 million. The dip in revenue was attributed to internal strategic shifts, including reduced emphasis on large-scale competition events within its Momo app and external factors like subdued consumer sentiment.

Breaking down its revenue streams, MOMO’s mobile marketing revenue saw a significant uptick, rising 26.2% year-over-year to RMB26.59 million ($3.66 million). Within its core segments, net revenue from Momo and Tantan, its popular dating app, amounted to RMB2.32 billion ($319.50 million) and RMB241.49 million ($33.27 million), respectively.

Further, the company’s income from operations rose 5.5% from the year-ago value to RMB460.32 million ($63.75 million). On a non-GAAP basis, its net income amounted to RMB59.85 ($8.29 million) and RMB0.31 per share. For the first quarter, analysts expected an EPS of $0.29, but MOMO reported an earnings per share of $0.04. On the other hand, its revenue came 3.1% above Wall Street estimates.

As of March 31, 2024, Hello Group’s cash reserves and equivalents increased to RMB15.12 billion ($2.09 billion), compared to RMB13.48 billion ($1.86 billion) as of December 31, 2023, reflecting robust liquidity amid operational challenges.

Despite exceeding expectations in its top line, MOMO’s outlook for the second quarter was disappointing. The company anticipates total net revenues ranging from RMB2.65 billion to RMB2.75 billion, reflecting a further decline between 15.5% and 12.4%. This projection reflects persistent uncertainties stemming from China’s economic conditions and regulatory environment, compounded by a recent slowdown in mainland retail sales growth.

Additionally, a crackdown on extravagant wealth displays on social media platforms like Momo and Tantan further complicates MOMO’s operational landscape. The company also highlighted increased investments in expansion initiatives and marketing, which might adversely affect profitability in the short term due to fixed cost dynamics.

The market’s attention has been drawn to its disappointing top-line guidance, which is evident in its 8.3% year-to-date decline. Nonetheless, it has returned 6.9% over the past three months, closing the last trading session at $5.81.

Now, let’s look at factors that could influence MOMO’s performance in the upcoming months:

Mixed Analyst Estimates

Analysts expect MOMO’s EPS to decrease 33.6% year-over-year to $0.29 for the second quarter ending June 2024. Similarly, its revenue for the current quarter is expected to decline by 14.6% year-over-year, settling at $369.24 million. However, MOMO has an impressive surprise history, surpassing the consensus revenue and EPS estimates in three of the trailing four quarters.

The company’s revenue and EPS for the current year (ending December 2024) are expected to decline 11.8% and 39.3% year-over-year to $1.47 billion and $0.94, respectively.

Nonetheless, for the fiscal year ending December 2025, MOMO’s revenue is expected to increase 2.9% year-over-year to $1.51 billion. The company is estimated to post an earnings per share of $1.29 in the next year, indicating a 37% improvement from the prior year period.

Discounted Valuation

In terms of forward non-GAAP P/E, MOMO is currently trading at 6.16x, 50.4% lower than the industry average of 12.42x. Similarly, the stock’s forward EV/Sales and EV/EBITDA multiples of 0.40 and 2.36 are 78.2% and 68.3% lower than the industry averages of 1.83x and 7.43x, respectively.

Additionally, the stock’s 2.53x forward EV/EBIT is 82.5% below the industry average of 14.51x. MOMO’s forward Price/Sales multiple of 0.73 compares to the industry average of 1.19.

Mixed Profitability

MOMO’s trailing-12-month EBIT margin of 19.83% is 125.3% higher than the 8.80% industry average. The stock’s 10.36% trailing-12-month ROTC is 188.3% above the 3.59% industry average. Further, its trailing-12-month net income margin and ROCE of 13.39% and 14.47% compares to the respective industry averages of 2.95% and 3.25%.

However, the stock’s gross profit margin of 41.55% is 16.6% lower than the industry average of 49.80%. Likewise, MOMO’s trailing-12-month levered FCF margin of negative 1.94% is lower than the industry average of 3.01%.

POWR Ratings Exhibit Mixed Prospects

MOMO’s stance is apparent in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MOMO has an A grade in Value, which aligns with its lower-than-industry valuation.

However, with mixed profitability metrics, the stock has earned a grade C for Quality. Also, the stock is trading above its 50-day moving average of $5.72 but below its 200-day moving average of $6.06, justifying its C grade for Momentum.

MOMO is ranked #34 out of 40 stocks in the B-rated China industry. Click here to access MOMO’s Growth, Stability, and Sentiment ratings.

Bottom Line

Given the company’s current financial outlook and the guidance provided by management, it appears to be facing significant challenges despite its comparatively low valuation within its peer group. The recent revenue guidance for the upcoming quarters suggests a downturn influenced by internal strategic adjustments and external economic factors in China.

With that in mind, investors could be wise to take a cautious stance and wait for a better entry point into the stock now.

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

While MOMO has an overall grade of C, equating to a Neutral rating, you may also check out these A (Strong Buy) rated stocks within the B-rated China industry: X Financial (XYF), FinVolution Group (FINV), and Sunlands Technology Group (STG).

To explore more A-rated Chinese stocks, click here.

What To Do Next?

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MOMO shares were trading at $5.88 per share on Monday afternoon, up $0.07 (+1.20%). Year-to-date, MOMO has declined -15.40%, versus a 15.64% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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