MOMO - Trading Below TBV Hello Group Keeps Churning Out Profits

2024-06-07 11:54:25 ET

Summary

• MOMO remains heavily undervalued. The stock's trailing P/E and P/FCF ratios are each 4.6 and its market cap is exceeded by tangible book value.
• Hello Group's revenue has been declining, but its profitability appears impregnable. If free cash flows declined by 50%, its FCF yield would still be in the double digits.
• The company's newer apps in non-Chinese markets are growing rapidly and now comprise 13% of total revenue. These green shoots contribute to the potential for stabilization of users and sales.
• Analyst forecasts anticipate roughly flat revenue YOY in 2025, potentially marking a turning point for the business.
• The company is returning excess capital to shareholders through share buybacks and dividends, with these deployments totaling hundreds of millions in recent years.

Two years ago, I covered Hello Group Inc. ( MOMO ) with an article entitled “ Hello Group: $5 Floor, $500 Potential For Long-Term Investors .” The $5 floor has thus far held up well, but Hello Group’s upside potential remains unrealized. The stock did trade around $10 for most of 2023 on hopes of revenue stabilization and a Tantan turnaround, but subsequently fell back into the $5 range as those hopes proved premature. The persistence of falling revenues, whether due to Chinese consumer weakness or deeper problems plaguing the company, has been contrary to my expectations. ...

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