Why Momo Inc. Stock Gained 77.7% in the First Half of 2018

Australian dollars in Sydney, Friday, Jan. 15, 2016. (AAP Image/Joel Carrett) NO ARCHIVING

What happened

Shares of Momo Inc. (NASDAQ: MOMO) climbed 77.7% in the first half of 2017, according to data provided S&P Global Market Intelligence.

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Strong quarterly performance, promising guidance, and the acquisition of former rival Tantan helped the dating and social networking company deliver big gains. However, there were some significant sell-offs at the end of June.

So what

Momo announced its plans to acquire Tantan on Feb. 23 in a cash-and-stock deal valued at roughly $800 million. The merger would make the combined company the far-and-away leader in China's mobile dating market. Shares saw a significant pricing increase following the announcement.

The social media company announced fourth-quarter results on March 7, with sales for the period climbing 57% year over year to reach $386.4 million. Investors were also pleased to see the Momo's paying user base return to growth, rising from 4.1 million in the prior-year quarter to 4.3 million in the December-ended period. Shares closed out the month up 13% thanks to the solid earnings report.

Momo closed its acquisition of Tantan on on May 11, and then published first-quarter results on May 29. The report delivered impressive sales and earnings growth that came in well ahead of the market's expectations. Sales for the period rose 64% year over year to reach $435.1 million, soundly beating the average analyst estimate's call for sales of $396.3 million. Adjusted earnings per share came in ahead of the market's expectations as well, arriving at $0.69 per share compared to the $0.50 per share in earnings called for by the average analyst estimate.


The company also reported that its paying user base increased from 7 million in the first quarter of 2017 to 8 million in the first quarter of 2018, and issued second-quarter guidance that was better than the market anticipated.

Now what

Momo stock has lost roughly 18% over the last month due to sell-offs across the broader Chinese tech sector and a critical note published by Spruce Point Capital Management on June 27.

The Spruce Point Capital Management note cites the maturation of the Chinese live-streaming market and the possibility of illegal operations at Momo for its "strong sell" rating on the stock.

Whether Momo will be able to sustain and increase its paying user base has been one of the big questions hanging over the company. The company's two earnings report in the first half of 2018 suggest a relatively promising outlook on that front, and the acquisition of Tantan removes a major competitive pressure and adds assets that help deliver long-term growth. However, investors should also keep in mind that there are reasons for uncertainty as to how the market, and Momo's position in it, will develop.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool recommends Momo. The Motley Fool has a disclosure policy.

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