Summary
- Hello Group's core Momo and Tantan mobile applications are likely to perform poorly in the near term, which represents short-term pain for the company and its investors.
- But Hello Group is well-positioned to deliver gains for patient shareholders in the long run, assuming that it executes well on its plans to grow revenue contribution from new apps.
- Hello Group's shares are rated as a Hold, as it is too early to turn bullish on the stock.
Elevator Pitch
I award a Hold rating to Hello Group Inc.'s (MOMO) shares.
Hello Group is a classic investment case of "short term pain, long term gain." The short term growth outlook for the company's key mobile applications, Momo and Tantan, is negative. But Hello Group's new apps like Soulchill have a long growth runway ahead.
My investment rating for Hello Group is a Hold. It is premature to rate Hello Group's shares as a Buy now; faster than expected growth for Hello Group's new apps in subsequent quarters will be the trigger point for a potential rating upgrade in the future.
Company Description
Hello Group refers to itself as "a leading player in China's online social and entertainment space" in the company's press releases .
The company's Momo is the leader in China's "Anonymous Social Networking" mobile application category, and boasted more than 100 million Monthly Active Users or MAUs in September 2022. Tantan is Hello Group's second most popular app with MAUs of over 20 million as of end-Q3 2022. Hello Group's other mobile applications include Duidui, Hertz and Soulchill, as highlighted in the company's most recent 20-F filing . Tantan and Duidui are dating apps, while Hertz and Soulchill are voice chat apps.
Momo and Tantan Apps Are Underperforming
Hello Group's Momo and Tantan apps saw their respective revenues decrease by -11% YoY and -33% YoY to RMB2,891 million and RMB341 million, respectively in the most recent Q3 2022 financial period.
Specifically, live streaming revenue for the Momo app declined by -21% from RMB1,932 million in the third quarter of 2021 to RMB1,518 million for Q3 2022. The Momo app also has other revenue streams such as value-added services and marketing services, but it is clear that the Momo app's live streaming revenue has contracted significantly in the recent quarter.
The Momo app's live streaming revenue has been negatively affected by tighter regulatory control over the Chinese live streaming industry. Hello Group admitted at its Q3 2022 earnings briefing that the decline in live streaming revenue for the Momo app was driven by both "COVID and the regulatory factors." Although China has moved away from its zero-COVID approach, the regulatory environment for the Chinese live streaming industry remains challenging. As such, it will be tough for the Momo app to grow its revenue in a meaningful way for the very near term.
Unsurprisingly, the Tantan app's live streaming revenue also fell by -41% YoY to RMB140 million in Q3 2022 as a result of regulatory headwinds for China's live streaming market.
It is noteworthy that value-added services revenue for the Tantan app dropped by -27% YoY to RMB202 million for the third quarter of last year. At the company's third quarter investor call, Hello Group disclosed that its Tantan app had gone through a "demonetization process" with the aim to "improve user experience and retention."
The number of paying users for the Tantan app had already decreased from 2.9 million for Q3 2021 and 2.2 million for Q2 2022 to 2.0 million in Q3 2022. There could be more short term pain in store for the Tantan app, as Hello Group has chosen to take the long-term view in enhancing the "user experience" and forgo near term revenue growth.
Furthermore, China's reopening isn't good news for Hello Group's Tantan app. It is reasonable to expect that more people in China might ditch online dating in favor of "meeting new people in the real world", in the initial stages of the country's reopening at the very least.
New Apps Could Become Key Long Term Growth Driver
I noted in the preceding section that the short term outlook for the company's Tantan and Momo apps isn't good. On the flip side, Hello Group's new mobile applications have lots of room to grow going forward.
The Duidui, Hertz, and Soulchill apps were introduced to the market in the 2019-2020 time frame. Hello Group revealed at its Q3 2022 results call that revenue generated from the Duidui, Hertz, and Soulchill apps grew by an impressive +154% YoY to RMB203 million (or a mere 6% of the company's top line) in the third quarter of the prior year.
One specific new app that deserves more attention is Soul Chill, a voice chatting app which was created in October 2019 specifically targeting markets outside China.
Hello Group participated in Jefferies' ( JEF ) Asia Internet Corporate Access Conference in early-January 2023, and specifically mentioned growth plans for the Soulchill mobile application. A January 4, 2023 research report (not publicly available) titled "Key Takeaways from Asia Internet Conference" published by JEF highlighted that Hello Group's Soulchill app has achieved "fast growth with opportunities in the Middle East, Turkey, Southeast Asia and South America."
Considering that Hello Group has cash and cash equivalents amounting to RMB13 billion or $1.9 billion on its books as of September 30, 2022, the company has sufficient capital to fund the growth initiatives for its new mobile applications, including Soulchill's overseas expansion plans.
Concluding Thoughts
My view of Hello Group's shares is mixed, which translates into a Hold rating. On one hand, I like the growth potential of Hello Group's new mobile applications. On the other hand, I am concerned that the near term growth prospects of Hello Group's core apps like Momo and Tantan are poor.
For further details see:
Hello Group: Short-Term Pain, Long-Term Gain