On Wednesday, BofA Securities revised its stance on Momo Inc . (NASDAQ: NASDAQ:MOMO), downgrading the stock from Buy to Underperform. The firm also adjusted the price target to $6.50, a decrease from the previous $8.50. The change in rating is attributed to concerns over the company's core business challenges and the potential for shareholder returns to fall short of expectations.
The analyst pointed out that investors are anticipating higher dividends from Momo Inc., which might not be met due to an expected decline in earnings and foreign exchange controls by the Chinese government. These controls could affect the company's ability to transfer funds out of China to pay dividends in USD.
The analyst expressed a conservative outlook on Momo's core business, particularly its live streaming segment. Due to a weak macroeconomic environment and reduced collaboration with Multi-Channel Networks (MCNs), live streaming revenue is expected to drop by 18% year-over-year in the second half of 2024 despite a low comparison base from the second half of 2023.
Another point of concern is the ongoing restructuring of the social app Tantan, which adds to the uncertainty surrounding the company's growth prospects. Momo Inc. has allocated a budget for sales and marketing expenses for Tantan for the latter half of 2024 and into 2025, which might also affect earnings growth. The analyst noted that past attempts at restructuring Tantan have not been successful, which warrants caution.
While the company's overseas business growth is on track and could help mitigate some domestic weaknesses, further expansion is dependent on localization efforts, which are time-consuming and may not immediately contribute to results. The analyst's cautious stance reflects these combined factors, leading to the downgrade of Momo Inc.'s stock rating and price target.
"In other recent news, Momo Inc. surpassed modest revenue and profit projections in its recent earnings report, according to Benchmark. However, the company is undergoing business adjustments, including a significant product upgrade for its subsidiary, Tantan, which are expected to impact its operations. Benchmark has consequently trimmed Momo's stock target from $15 to $13, while maintaining a Buy rating.
In the same vein, Hello Group Incorporated reported mixed financial results for a recent quarter. The company's total revenue reached RMB2.69 billion, marking a 14% year-over-year decline but a 5% sequential increase. Adjusted operating income fell to RMB477 million, a 33% decrease year-over-year and a 7% sequential decline.
Hello Group is focusing on improving Tantan's user experience and profitability, while maintaining the productivity of the Momo app. The company anticipates third-quarter revenue between RMB2.58 billion and RMB2.68 billion, a year-over-year decrease of 15.2% to 11.9%. Growth initiatives are also underway in the MENA region, with a focus on localization and live streaming."
InvestingPro Insights
Recent data from InvestingPro provides additional context to BofA Securities' downgrade of Momo Inc. (NASDAQ: MOMO). Despite the analyst's concerns, Momo's financials present a mixed picture. The company's P/E ratio of 6.32 and Price to Book ratio of 0.78 suggest that the stock may be undervalued. This aligns with an InvestingPro Tip indicating that Momo is "trading at a low earnings multiple."
However, supporting the analyst's cautious outlook, InvestingPro data shows a revenue decline of 8.91% over the last twelve months, with a more pronounced 14.22% drop in the most recent quarter. This trend corroborates the analyst's concerns about the company's core business challenges, particularly in the live streaming segment.
On a positive note, Momo maintains a strong balance sheet, with an InvestingPro Tip highlighting that the company "holds more cash than debt." This financial stability could provide some cushion as Momo navigates its current challenges and pursues restructuring efforts for Tantan.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Momo Inc., providing a deeper understanding of the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.