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MARKETS LIVE BLOG:

STOCKS SHED GAINS, TESLA SURGES DAY AFTER EARNINGS

Tesla shares jump after EV maker vows to speed up launch of more affordable models

Why Momo, Inc. Stock Fell 18.7% in September

newsfeedback@fool.com (Keith Noonan)
Updated

What happened

Momo Inc. (NASDAQ: MOMO) stock lost 18.7% of its value in September, according to data from S&P Global Market Intelligence. The Chinese social media company's seemingly impressive earnings release in August was followed by sell-offs that carried through to September as investors weighed slowing growth against the stock's premium valuation.

The chart below tracks Momo stock's performance over the last three months.

Stock chart showing Momo stock decreasing 19.8% over the last three months.
Stock chart showing Momo stock decreasing 19.8% over the last three months.

Image source: Yahoo Finance.

So what

Video accounted for 83% of the company's sales last quarter, but not every aspect of the company's streaming business is delivering growth. The company added 6.1 million new monthly active users from its March-ended quarter to its June-ended quarter, reaching 91.3 million, however the number of paying live-stream viewers stayed flat at 4.1 million.

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Hosting and serving videos is cost intensive, so indications that Momo is having trouble expanding its paying user base, along with comments from management that overall engagement was roughly flat, could signal a substantial growth slowdown in the near future. The company's operating expenses have already grown faster than sales in its last two quarters, further complicating the picture.

On the other hand, paid subscriptions are not the company's only, or most important, revenue stream. Even without paid-user growth, the company's average revenue per monthly active user increased nearly 160% year over year last quarter.

Now what

Momo shares trade at roughly 19 times forward earnings estimates. Given the company's impressive growth, that's a valuation that could point to a buying opportunity for investors who are willing weather potential volatility with the stock. Looking at another metric, the company's forward price-to-earnings-growth ratio is roughly 0.15 -- another indicator that suggests the stock could be a good buy at current prices.

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