2023-10-31 10:45:06 ET
Summary
- MOMO's recent downtrend may be coming to an end, with signs of a bottom forming.
- Q2 earnings showed strong performance, with sequential growth and improved profitability.
- MOMO's cheap earnings and high dividend yield make it an attractive investment option.
Intro
We wrote about Hello Group Inc. ( MOMO ) back in early June of this year after the company's first-quarter earnings when we reiterated our bullish stance on the Chinese company. The company's slowly but increasing profitability (where we witnessed Tantan's numbers finally turning positive which aided in the Q1 earnings beat), strong balance sheet and ultra-low valuation were key reasons why we reiterated our bullish stance at the time.
Although shares rallied after our early June commentary (To almost $11 a share by mid-July), shares then entered a sustained period of lower highs and lower lows. Furthermore, the change in trend resulted in a moving average death-cross (crossing over of the stock's 50-day moving average below its corresponding 200-day counterpart) which subsequently hurled shares down to approximately the $7 level. Technically though, we are beginning to see signs that the recent down-trend is coming close to having run its course. We state this because of the divergence in the stock's momentum RSI indicator. Furthermore, the ADX trend-following indicator is very close to giving a short-term buy signal which is another sign that shares of MOMO are close to a firm bottom here.
Q2 Earnings
The company registered ' beats ' for both its top-line & bottom-line numbers in Q2 this year. Although MOMO's top-line sales may have fallen by a pretty steep margin over the past couple of years, near-term sequential trends have been encouraging which Q2 highlighted once more. Sales of $432+ million in Q2 grew by 11% sequentially which resulted in a net GAAP profit of $78.3 million ($21.5 million increase) for the quarter. Suffice it to say, despite MOMO's negative top-line growth rates in recent times, the company's trailing net profit margin is now approaching 15% which is significantly better than MOMO's 5-year average of 8.34%.
Suffice it to say, Hello Group's sustained improvement in its Tantan business, the repeated strong performance in the Momo 'cash-cow' business, and management's ability to be able to continuously take costs out of the business all point to sustained profitability in the Hello Group for some time to come. This means forward-looking top-line growth (where Q3 sales are expected to fall sequentially) is not as important as the profitability the company continues to report. This remains so for the following reasons.
Earnings Remain Ultra-Cheap
MOMO's trailing 12-month bottom-line GAAP earnings come in at $249.1 million. Now when we divide this number by the current number of shares outstanding (189.52 million), we get trailing 12-month earnings of $1.31 per share. Now since shares of MOMO closed last Friday at $7.03, when we divide this share price by our trailing GAAP earnings number ($1.31), we get a trailing GAAP earnings multiple of 5.35.
What does this multiple really mean? Well, if we invert the multiple and state it as an earnings yield (18.69%), this return reflects what we as shareholders would receive if management decided to pay out all of its net profits in the form of an annual dividend. Now, earning such a high yield every year rarely happens for investors as companies only pay out a portion of their earnings in the form of a dividend plus other investments, and/or share buybacks also receive a chunk of the company's earnings over time.
Earnings Yield Comes In Above 18%
However, the concept of a company's 'earnings yield' immediately demonstrates the potential the company has concerning forward-looking growth because even if earnings are not invested wisely, investors should see still book value (or net worth) gains over time. Take the 10-year US treasury bond for example which is yielding almost 5% as I write. Many investors (due to rising interest rates) continue to flock to fixed-income investments because of the alleged 'security' they offer. While this may be true with respect to nominal gains, (investors would receive $50 per year over the next 10 years off a $1000 initial investment and subsequently the return of their $1000 investment in 10 years' time), how 'valuable' would that $1000 be in 10 years' time is the real question.
MOMO on the other hand is currently paying a 10%+ dividend yield ($0.72 per share paid out earlier this year) which means the company's elevated retention ratio of 45% is ample-big enough to keep on growing the company over time. Studying earnings yields is as important as ever given how inflation has remained elevated. For this reason, we continue to recommend that investors buy this name.
Conclusion
To sum up, taking MOMO's cheap earnings into account, the most important trend for us in MOMO is its trend of sustained profitability. As long as the company continues to report similar earnings numbers, the natural progression is a more valuable company over time even if forward-looking returns on capital do not come in as envisaged. We look forward to continued coverage.
For further details see:
Hello Group: Strong Earnings Yield And Stable Profitability To Result In Share Price Gains