MOMO Is Not Getting Love From Investors

The Chinese social media company, Momo (NASDAQ:MOMO), is many things. One part of the company, Tantan, is an online dating site that is compared to Tinder. Then there’s Momo, its namesake app, which is an online dating service and more. In fact, it’s a potpourri of social media, video, gaming, and messaging rolled into one.

The jack-of-all trades approach makes some sense. With a country as large as China, a social media app should play very well. But Momo has underperformed this year.

Still earnings reports have a way of breathing new life into underperforming stocks. The whisper number for Momo suggests that Thursday will be a very good day for the stock. If that number is to be believed, MOMO earnings will surprise investors to the upside by four cents per share. And that should send the stock climbing.

But is MOMO a stock you should own? I struggle with it for a few reasons that I’ll unpack right now.

It’s Tough Out There

Dating can be uncomfortable in the best of times. In the midst of a global pandemic I have to imagine it’s far down on the list. Momo certainly believes that’s the case. The company cited “weak dating sentiment caused by the virus related disruptions” as a reason for the poor numbers it posted during the first quarter of the year.

In May, the company reported that the core Momo app saw a 6% year-over-year (YoY) decline in monthly active users (MAUs). The 108 million MAUs was also a 6.5 million net decrease from the prior quarter. Momo also generates a significant amount of revenue from live video. And while that category accounted for 65% of its top line, it was down 13% on a YoY basis.

This meant that even though the company posted better than expected revenue from its value-added services (i.e. virtual gifts and subscriptions), it was not enough to overcome the decline in video revenue.

The news wasn’t any better for Tantan. That app saw its net revenue decrease by $300,000 to $4.2 million.

This will be the first earnings report since China has mostly re-opened. Investors will clearly want to see an improvement on those numbers. And Momo clearly has a first-mover advantage that would imply the company will see growth in this category. But, the size of the company’s moat – if it ever had one – appears to be shrinking.

Competition is Increasing

As far as the company’s Momo app, there is a competition building from Tencent (OTCMKTS: TCEHY). Late in 2019, Tencent launched three separate dating apps that would seem to be taking direct aim at Momo.

And this makes sense for Tencent. The company own dominates the mobile messaging market with its WeChat service. And in 2020, Tencent has added nearly $200 billion to its market capitalization.

But, like Facebook (NASDAQ:FB) in the United States, the app is a little long in the tooth for the younger generation. These consumers are turning more towards TikTok and Bilibili (NASDAQ:BILI).

What better way to reach this younger generation than through online dating. Granted, Tencent’s timing may have left something to be desired. And Tencent may be distracted by its attempt to compete with Baidu (NASDAQ:BIDU) in the online search category. But there’s no doubt the company has the resources to make things uncomfortable for Momo.

Chinese stocks could still be delisted

I’m not sure if this is just a game of cat and mouse. And after the election in November, it may be a moot point. But nevertheless, Chinese stocks remain in the crosshairs of U.S. regulators for failing to comply with regulations and compliance metrics that are required by other countries to trade on U.S. exchanges.

This would be the least of my reasons to be concerned about Momo, but it does beg the question of whether the juice is worth the squeeze?

Momo Looks Like a Trade Not an Investment

Shares of Momo have gone up nearly 10% in the last month. However, in the last five trading days prior to September 2, the stock is down about 3.5%. As MOMO heads into earnings, it looks like traders are trying to breathe life into the stock. But I’m not sensing a lot of conviction.

This is looking like traders buying on the dip and getting ready to sell off shares after that. Then wait for an attractive point to do it all over again. Rinse, lather, repeat.

It’s not a strategy that interests me, but if it’s your cup of tea, then Momo may present an interesting opportunity over the next few days. But as a long-term opportunity, I’m not prepared to commit to Momo.