Why Momo Is Tanking Despite Explosive Growth

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Momo Inc. (NASDAQ: MOMO) reported its fiscal second-quarter financial results before the markets opened on Tuesday. The Chinese social network said that it had $0.35 in earnings per share (EPS) and $312.2 million in revenue. That compared with consensus estimates from Thomson Reuters of $0.31 in EPS and revenue of $286.33 million. In the same period of last year, Momo posted EPS of $0.12 and $99.0 million in revenue.

On the surface, this looks like an incredible quarter, with revenue growing over 200% from last year. However, at the rate that this company has grown over the past year, there might have been some unrealistic expectations, despite beating analysts’ estimates.

The stock has vastly outperformed the broad markets, up nearly 150% year to date, and over 180% in the past 52 weeks.

In terms of its segments, Live video service revenues totaled $259.4 million. The rapid growth in live video revenues was largely contributed by the increase in the quarterly paying users, which was 4.1 million for the quarter.

Value-added service revenues were $24.6 million. The year-over-year increase (58%) was primarily driven by the increase in the number of paying users and the increase in the average revenues per paying user per quarter as a result of that Momo introduced more value-added services to its users.

Mobile marketing revenues were $19.0 million. The growth in mobile marketing business was driven by better sell-through of existing advertisement inventories. Mobile games revenues were $9.1 million. The increase in game revenues was mainly due to the contribution of a self-developed game, for which it recognized revenue on a gross basis.

The company did not give any guidance for the current quarter, but analysts are predicting $0.34 in EPS and $307.13 million in revenue.

On the books, Momo cash, cash equivalents and term deposits totaled $846.3 million at the end of the quarter, up from to $651.3 million at the end of the previous fiscal year.

Yan Tang, board chair and chief executive of Momo, commented:

I’m pleased that we delivered another strong quarter to our shareholders. User base growth continued to accelerate, driven by the expansion of our video content ecosystem. The usage of short video service has reached new milestones and revenues from live video service has hit new record highs. More importantly, with the newly launched 8 series, we have moved on to make new explorations and innovations in the social and entertainment territories. We believe these pioneering efforts will allow us to capture the many emerging opportunities that we are seeing on the horizon and thus will help us build longer term growth drivers for the Company.

Shares of Momo were last seen down about 17% at $37.37, with a consensus analyst price target of $48.88 and a 52-week range of $16.73 to $46.69.