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blue-chip

Punt on This Small-Cap Communication Service Stock – MOMO

Feb 10, 2022 | Team Kalkine
Punt on This Small-Cap Communication Service Stock – MOMO

Hello Group Inc.

MOMO Details

Hello Group Inc. (NASDAQ: MOMO) is a social networking and entertainment company based in China. Momo, Tantan, and other MOMO platform products allow consumers to explore new relationships, develop social connections, and have meaningful conversations. The company's main revenue streams are live streaming, value-added, mobile marketing, online gaming, and other services. As of February 09, 2022, the company had 196.95 million American Depository Shares (ADS) listed and outstanding (each ADS representing two Class A ordinary shares).

 Q3FY21 Results:

  • Slight Decline in Topline: The company reported a YoY decline of 0.20% in total net revenue to RMB 3.76 billion in Q3FY21 (ended September 30, 2021) from RMB 3.77 billion in Q3FY20, owing to the structural reform on its core live video business and decrease in Tantan's live streaming revenue due to shift in the strategic focus.
  • Reduction in Profitability: Net income for Q3FY21 reduced 11.72% YoY and stood at RMB 403.19 million vs. RMB 456.73 million in Q3FY20.
  • Cash and Debt Position: As of September 30, 2021, the company's cash balance stood at RMB 9.29 billion, with a total debt of RMB 4.61 billion.

Key Risk:

  • Political and Regulatory Risk: The Chinese authorities' recent 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 that 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.

Outlook:

  • FY21 Guidance: As of the Q3FY21 press release, MOMO expects to clock revenue of RMB 3.60 - 3.75 billion, representing a YoY decline of 5.1 to 1.2%. This prediction, which is subject to change, includes the company's current and preliminary opinions on the market and operating conditions.

Valuation Methodology: EV/Sales 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 share price has fallen 41.42% in the past twelve months and currently leaning towards the lower-band of the 52-week range of USD 8.17 to USD 20.14. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 12.34.

Considering the significant correction in the stock price in the past twelve months, strong balance sheet, high profitability margins, and current valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of USD 10.00, up 2.04% as of February 09, 2022.