2023-10-13 11:21:04 ET
Summary
- I view MOMO's recent developments relating to the pace of share repurchases and its forward-looking financial guidance as unfavorable.
- Hello Group currently trades at a low single-digit forward EV/EBITDA multiple and a mid single-digit forward P/E ratio.
- MOMO's rating stays as a Hold, after I evaluated its key valuation metrics and latest developments.
Elevator Pitch
My investment rating for Hello Group Inc. (MOMO) stock is a Hold. I previously touched on MOMO's outlook for the near term and prospects in the long run in my February 21, 2023 initiation article .
Recent developments such as the non-disclosure of certain operating data, below-expectations Q3 guidance, and a lower amount of capital allocated to share buybacks have been disappointing. On the flip side, Hello Group's valuations are pretty depressed, which prices in most of the negatives for the name in my view. Therefore, I have decided to stick with my existing Hold rating for the stock.
MAU Data For Momo App Won't Be Disclosed In The Future
Earlier in June this year when Hello Group reported its Q1 2023 results, the company revealed that the "Monthly Active Users ('MAU') on Momo application" declined by -4% YoY from 110.9 million in March last year to 106.5 million for March this year.
However, Hello Group didn't disclose the latest MAU data for its Momo app when the company announced its Q2 2023 financial performance at the end of August.
Hello Group explained at its second quarter results call that "MAU (for the Momo app) is no longer the most meaningful operational metric for investors", because its "focus has shifted from driving the growth of mobile user sales to pursuing profitable user growth."
There are two matters worthy of note regarding this latest development.
Firstly, I believe it is always better for listed companies to disclose as much data as possible, and allow investors to determine which particular data point is relevant for their analysis. As such, I don't think that Hello Group has sent a positive signal to investors with its decision to discontinue the disclosure of the MAU metric for the Momo app.
Secondly, Hello Group highlighted that it is placing a greater emphasis on "profitable user growth", but recent numbers suggest that the focus on profitability is still a work-in-progress for the company. The number of paying users for Hello Group's Momo app decreased by -8% YoY from 8.6 million for Q2 2022 to 7.9 million in Q2 2023.
Third Quarter Revenue Guidance Is Below Expectations
Hello Group continues to provide quarterly top-line guidance, even though it isn't disclosing the Momo app's MAU going forward.
Specifically, Hello Group is anticipating that the company will report a revenue of RMB2.95 million for the third quarter of 2023 based on the mid-point of its guidance. This implies that Hello Group's top line could potentially contract by -9% YoY and -6% QoQ in Q3 this year. To make things worse, the company's Q3 2023 sales guidance was -9% lower than the sell-side analysts' prior consensus estimate as per S&P Capital IQ data.
The company's financial performance might remain weak for a longer than expected period of time, as it faces both macroeconomic and regulatory headwinds. Hello Group noted at its Q2 2023 earnings briefing that its third quarter guidance is "reflecting the macro impact on live streaming" and "the product adjustments as directed by MIIT (China's Ministry of Industry and Information Technology)."
Slower Pace Of Share Repurchases Is Disappointing
Hello Group initiated a new $200 million two-year share buyback plan in June last year, which is critical for the company due to two key factors.
The first key factor is that share buybacks serve as a way of returning excess capital to shareholders, considering that Hello Group had cash and investments in excess of RMB11 billion (or $1.5 billion which exceeds its market capitalization) on its books as of end-Q2 2023. The second key factor is that sustained share repurchases help to convey the message that the company's shares are undervalued.
As of the end of August this year, the company has executed $57.2 million worth of share repurchases. But it is important to note that Hello Group only spent approximately half a million dollars on share buybacks in 2023 year-to-date, which means that the vast majority of the company's share repurchases were done in 2H 2022.
Hello Group's buybacks this year thus far didn't meet my expectations.
Valuations Are Depressed
In the earlier sections of this article, I highlighted a number of negatives for Hello Group. But I don't think that the stock is deserving of a Sell rating, given that its shares are inexpensive.
Hello Group's stock price dropped by -24.7% in 2023 year-to-date. Based on its last traded share price of $7.16 as of October 12, 2023, the market currently values Hello Group at consensus forward next twelve months' Enterprise Value-to-Revenue, EV/EBITDA, and normalized P/E multiples of 0.35 times, 1.9 times, and 5.3 times, respectively.
Taking into account the company's recent share price performance and the stock's current valuation metrics, the unfavorable factors for Hello Group are likely to have been priced in to a considerable extent.
Closing Thoughts
I have a negative opinion of Hello Group's recent developments, but the stock is already valued by the market at pretty low multiples. As such, I continue to rate Hello Group as a Hold.
For further details see:
Hello Group: Consider Both Recent Developments And Valuations