- Momo is a Chinese social media stock investors do not understand because there is no Western equivalent, leading to a severe market mispricing.
- The company is priced for imminent bankruptcy despite a monopoly in its market, unbroken history of profits and enough net cash to buy back half its float today.
- Investors have tunnel vision on struggling livestream revenues, while Momo has quietly built out its VAS business to rival and one day overtake livestream.
- No less than China’s Tencent has tried to compete against Momo in its own house, and failed.
- Conservative gray sky price target: $29.48 (+94%).
Chinese equities continue to underperform year-to-date, afflicted by negative market sentiment surrounding the PRC crackdown on Internet conglomerates, the possibility of Chinese ADRs being delisted as a casualty of the ongoing US trade war against Beijing, and the spectacular implosion of Archegos Capital Management. This has set up the ideal environment for contrarian investors to flourish. Although the BATs (Baidu, Alibaba, Tencent) receive the lion’s share of the attention (and headlines), one incredibly undervalued Chinese social media company is quietly flying under the radar of American analysts, financial institutions, and retail investors. Flushed with cash, patiently building out its business day by day according to its grand strategic vision, with no direct competitors in sight, Momo represents a heavily asymmetric opportunity that is set to soar.
Momo: Mysterious and Misunderstood
Due diligence indicates this opportunity exists because American investors often do not understand the product. Internet research reports on Momo are commonly composed by analysts who readily admit they have no hands-on experience with the app. Like many Chinese apps, Momo is not available for download outside of China on either the Apple App Store or the Google Play Store.
Momo is a difficult business to comprehend for Western investors because it is unlike anything that currently exists in the West: it is one of a kind. For instance, Alibaba is frequently called the Chinese Amazon, Tencent’s WeChat is the Chinese Facebook, Baidu is the Chinese Google. These aren’t perfectly accurate comparisons, but they suffice. Unlike the other platforms, no direct parallel to Momo can be drawn.
Momo’s namesake product is essentially a geolocation-powered social media app that connects a user to nearby peers based on proximity and common interests. The closest Western analogue is actually Meetup – the two platforms function in entirely different ways, but they share an overarching mission of connecting people to strangers in their local communities. Momo users can see profiles and mixed media posts from other nearby users through the app, follow them, and attempt to initiate contact with interesting parties. The feed is curated by Momo’s proprietary algorithms to match users based on highest likelihood of successful interactions.
Complicating this story is that almost since inception, Momo’s usage hours and revenues largely derived from everything except what the app was originally created to do. Since its formative days, Momo has been used as a hookup app by China’s netizens, due to its convenient geolocative features and the lack of any dedicated romance apps on the market. The company has since added a true dating app to its portfolio in May 2018: Tantan, the Chinese Tinder.
The other plot twist: since 2016, the bulk of Momo’s revenues have been produced not by subscriptions to the main platform, but by its secondary live video business. The company added livestream as a feature to the base app in September 2015, originally as a broadcast product for professional musicians called Momo Live. Encouraged by positive engagement metrics, Momo soon opened Momo Live to all users. Live video rapidly became a staggering success, benefiting from first mover advantage that allowed livestream revenues to compound at 70% annualized for the next 3 years to quickly overshadow subscription revenues from core Momo.
Today, Momo the company can be best visualized as a 2×2: 2 revenue streams bundled within 2 apps. The first sales category is live video service, monetized by percentage take of user donations to broadcasters. The second category is value-added service, monetized through premium subscriptions and a virtual gift economy. The first app is Momo, a platform to connect users by geolocal proximity and shared interests. The second app is Tantan, Tinder clone extraordinaire with exactly the same swipe logic. Momo’s annual reports break net revenues down into live video service and value-added service, then further parses the data by platform (Momo or Tantan).
Due to management’s continual efforts in use case expansion over the past few years, Momo has developed into a complex, multidimensional app with many distinct use cases, such as nearby people/posts, interest groups, chat rooms, karaoke, moderated virtual parties, matchmaking, and interactive mobile games. The company occasionally supplements these offerings with professional-grade offline entertainment productions like variety shows (Phanta City) and music tours to build brand equity.
For a firsthand perspective on Momo’s livestream product from an American travel influencer who peaked at 300K followers on the app, see Lauren Hallanan’s blog.
Tantan is available for download on Western mobile devices, it is sometimes used by foreigners seeking to date Chinese nationals. The US version of the app is not the same as the Chinese, Tantan redesigned the US interface in 2018 as part of a binding settlement agreement with Match Group (MTCH) to resolve an IP dispute.
Sample Momo screenshots annotated with key translations (Source: Author)
The Bear Case
The bear case is fairly simple: as seen from the chart below, Momo’s stock has gone precisely nowhere for the last 5 years.
For value investors, this conspicuous lack of upward momentum may be a bullish rather than bearish signal. However, Momo is currently pressured by a much more pressing fundamental headwind: its lucrative cash cow, the livestream business, has stagnated and reversed course in 2020. As reported in the 2020 annual filing, live video service revenues declined 22% YOY, and 31% in Q4, indicating the deterioration is accelerating rather than slowing down.
No wonder investors are running for the emergency exit. Momo began January 2020 at $36 an ADR and has since bled out more than half its value, currently rangebound between $14 and $16. The company attributes the decline to ongoing operational restructuring to create a healthier long term ecosystem, but the truth is, livestreaming is a cutthroat business in China where Momo’s first mover advantage is no longer sufficient and it is now a small fish in the big ocean.
Much larger players with impregnable competitive moats have entered the space: ByteDance’s Douyin, known in the West as TikTok, Tencent’s majority investment in Huya, the Chinese equivalent of Twitch, Baidu’s acquisition of YY Live for $3.6 billion. The advantage these companies possess is not only their deep capital resources, but also their ability to integrate livestreaming into the ecosystems of their core products, of which they are all market leaders. For example, Weibo is a popular microblogging platform for A-list celebrities in China (Weibo is the Chinese Twitter), which bestows an irreplicable competitive edge to its livestream product Yizhibo due to the heavy celebrity presence.
Momo cannot directly compete: its live video service is an independent feature that has poor synergies with core Momo, which itself is a much smaller platform compared to its deep-pocketed rivals. This harsh reality is not lost on Momo’s C-suite, who have been trying to reorganize the app to a long tail ecosystem for many months, if not years. Investors unfamiliar with long tail theory can read “The Long Tail: Why the Future of Business is Selling Less of More” by Chris Anderson, who first introduced the concept in 2004.
Momo is essentially trying to pivot from being a mainstream platform populated by (and dependent on) elite broadcasters and whale users, to a specialty livestream product with compelling verticals, catering to small/middle cohort audiences underserved by the big players. Momo is also trying to differentiate itself from competitors by leveraging its social networking DNA to emphasize the social rather than consumptive dimension of content, e.g. integrating video with native Momo features like profile pages, nearby people, news feed, and interest groups.
Whether the company’s positioning strategy for livestream can succeed remains to be seen. China’s livestreaming landscape is brutally competitive, this is why JOYY (YY) sold all its Chinese assets to Tencent and Baidu to invest exclusively in its overseas operations. Momo’s golden goose may soon be cooked.
The Bull Case
The bull case is even simpler: even if investors’ worst fears transpire and Momo’s livestream business ceases to be a going concern in the next few years, the stock is still criminally underpriced by every measure.
First, let’s address the elephant in the room: livestream. For fiscal year 2020, core Momo reported live video service revenues of $1.32 billion (Tantan’s livestream revenues are new and not afflicted by secular decline). For our gray sky scenario, we will assume this business continues to contract by -20% a year to reach a terminal value of 0 by year 5.
Year 1: $1.06 billion
Year 2: $0.79 billion
Year 3: $0.53 billion
Year 4: $0.26 billion
Year 5: $0
Discounted backwards at 5%, livestream’s future remaining revenues are worth $2.4 billion in today’s dollars. Momo runs at 20% after tax margins ex Tantan, so we model a similar profit margin accreting to tangible book, for a net present value of $480 million for Momo’s livestream business.
Livestream may have been Momo’s cash cow, but value-added service is the cash calf, who will soon be ready for prime time when the cow dies. See CEO Wang Li’s comments on the Q4 2020 earnings call:
“VAS having been growing robustly for the past 2 years, still has plenty of growth opportunities both in terms of traffic and in terms of new revenue features. As a social platform, 70% plus of our DAU and 80% plus of total time spend are not related to livestreaming at all. Having VAS as a main revenue source will eventually prove to the investor community our potential and advantage as a social networking product as opposed to a livestreaming product. That’s an important role I’ve set for the team for 2021 and beyond.”
See also trailing 5 year VAS growth trajectory from the 2020 annual report:Note these figures include VAS revenues for Momo and Tantan combined; VAS for core Momo grew even faster at 31% YOY. VAS has quietly evolved from a negligible impact item to a robust top line contributor equal to 53% of livestream revenues in the trailing fiscal year. In the conference call, Wang Li notes this number is on target to hit 80% in Q1 2021.
“At this point, we’re definitely seeing more growth potential in offering richer value-added services in the social space versus in the live streaming space.” – Wang Li, Q3 2020 earnings call
VAS is the future of the company, and management knows it. Under the same 20% net margin projection, core Momo VAS ($575 million in sales) is capable of generating $115 million in profit today. What’s a fair earnings multiple for a profit-positive social media platform growing sales at 30%+ annualized? Let’s conservatively assign a multiple of 20 (for reference, Baidu is at 22 with flat revenues, Weibo normalizes at 28 despite -5% revenue contraction, and Facebook is at 30 with 22% revenue growth). This values Momo VAS at $2.3 billion.
Turning our attention to Tantan, Momo’s other app. As mentioned earlier, Tantan is a Tinder clone that’s currently the top dating app among Chinese young adults in Tier 1 urban centers. Momo acquired Tantan three years ago in a cash and stock deal worth $735 million. This was an incredibly prescient move by Momo’s management team. At the time, Tantan was the only competitor that could’ve possibly dethroned Momo as the king of online dating in China. With both platforms under its control, Momo secured itself a veritable monopoly with no credible challenger in sight.
Tantan has blossomed under Momo’s custody. Extrapolating from Momo’s pro-forma accounting on its 2018 annual report, Tantan’s annualized revenue at time-of-buyout was ¥521 million RMB. In just two years, that figure has shot up 350% to ¥2.36 billion RMB. If we apply the same price/sales multiple to Momo’s initial acquisition price, that values Tantan at $3.3 billion in US dollars today. To be extremely conservative, and to discount Tantan for presently being cash flow negative, we will apply a 50% markdown to value Tantan at $1.65 billion.
To put that number into perspective, Match Group’s Tinder was last valued at $10 billion in 2019, and Bumble (BMBL) currently commands a valuation of $11 billion on the public markets after a February 2021 IPO. Tinder boasts 6.6 million paying users and Bumble has 2.5 million, versus 3.8 million for Tantan. Tantan’s 2020 sales were $364 million ($8 ARPU), versus $582 million for Bumble ($19 ARPU) .
The last piece of this valuation puzzle: Momo’s utterly ridiculous cash hoard of $2.6 billion, almost its entire market cap. Subtract $714 million in convertible senior notes (these convert at $61/ADR, so no dilution risk), and we arrive at a net cash position of $1.89 billion (dividends subject to withholding tax).
The final verdict: fair value of $6.32 billion for the whole company, or $29.48 per ADR on a fully diluted basis ex convertible debt, representing +94% upside from last Friday’s price of $15.17 at the closing bell.
To drive the bull thesis home, consider that in 2015, Momo founder, chairman, and then-CEO Tang Yan formed a consortium with Alibaba’s private equity arm and a number of other investors, including Sequoia Capital, to take Momo private at $18.90 per ADR. At the time, all Momo owned was a barebones base app generating $44 million in trailing fiscal year revenue and $450 million in cash equivalents on the balance sheet: no livestream, no Tantan. Today, it is a significantly larger outfit generating $2+ billion in sales across all operations, with $1.9 billion in net cash…but its ADRs are even cheaper on the open market than its 2015 buyout offer. That deal didn’t ultimately close, but it gives key insight into what the man who knows this company best, Tang Yan, thought it was worth, during a time when it was worth much less than today.
The same 5-year price chart as before, now superimposed with Momo’s revenue and book value growth over time:
Risk Factors: The Cautionary Tale of Sina Corp.
Given Momo’s virtual monopoly in both platonic and romantic geolocation-based social media in China (CFO Jonathan Zhang: “We don’t really feel any strong or direct competition that we should be worried about…We are by far the market leader currently”), we believe the main risk factor for Momo investors is voting rights concentration in the hands of a single individual: Tang Yan. Through his company Gallant Future Holdings Limited, Mr. Tang owns 20% of Momo and controls 70% of the vote. Although this situation is not unusual for US tech firms (Mark Zuckerberg controls 58% of Facebook’s vote, Larry Page and Sergei Brin collectively control 51% of Alphabet’s vote), in China, vote concentration in mid-cap tech stocks presents a peculiar risk factor of which investors need to be cognizant. This is best exemplified by the cautionary tale of Sina Corp.
Last year, we bet big on Sina at $32 a share after noticing its 45% stake in Weibo was worth more than double Sina’s then market cap. A few months after we finished building our position, Sina announced it was being taken private at $43.30 per ADR in a buyout by New Wave MMXV Limited. New Wave is a British Virgin Islands company owned by chairman and CEO Charles Chao that controlled 58% of Sina’s vote. Sound familiar yet? Minority shareholders were outraged, with 35% submitting a notice of objection. It was futile: the buyout merger finalized and Sina delisted from the Nasdaq on 3/22/2021. With Sina’s Weibo stake currently worth $80/share, there’s no question minority shareholders got the short end of the stick in this transaction. We booked a tidy 35% gain in six months, but investors who bought Sina for $120 an ADR at its 2018 peak must have been furious.
All the same pieces are in place: will history repeat with Momo? There’s no question chairman Tang Yan, whose stake in Momo is worth $600 million, would block any lowball takeover attempts by a third party. But if Momo stock drops significantly from its current support, it may open the opportunity for Mr. Tang to flex his majority voting power to take the company private himself, locking in investor losses. Would he actually do it? Not being members of Mr. Tang’s inner circle, we cannot speculate with any confidence. What we do know is he’s tried a take-private bid once before.
The risk is real: Momo may be undervalued now, but it could also become more undervalued in the near term. Having a single wealthy entity with vote control means investors may not have the luxury of waiting for the market to return to rationality in the event of a free fall. If that entity chooses to take advantage of market mispricing to privatize the company, minority shareholders could do nothing but watch.
We also believe the risk to be tolerable. Momo’s cash on hand is worth $9 an ADR, Tantan alone is worth $8/ADR. We assess the probability of Momo falling significantly below its current market price, and staying there for long enough for a privatization bid to succeed to be minimal. There is potential downside, but investors are more than adequately compensated by the tremendous upside waiting to be unlocked.
A common concern among investors regarding Chinese ADRs is the specter of fraudulent accounting, particularly with small and mid-caps. This issue sparked a media firestorm last year with Muddy Waters’ well-publicized takedown of Luckin Coffee. Of the Chinese equities we’ve analyzed, Momo is actually the company in whom we have the most faith its reported numbers are legitimate, for two reasons.
Firstly, the company, recognizing its perennial undervaluation, is engaging in share buybacks, having authorized a $300 million repurchase program last September and having executed on $49 million in completed buybacks as of March 2021 (we believe it should be even more aggressive with this program, although China’s capital controls on outflow may restrain since most of Momo’s cash is denominated in RMB). The second, even more convincing testament to Momo’s accounting legitimacy is its return of excess capital to shareholders in the form of a special dividend for three years running: $0.62 per ADR in 2019, $0.76 in 2020, and $0.64 in 2021, equating to a 4% yield.
A tech company that pays dividends is already a rare specimen, a tech company of Momo’s size paying such a large dividend has never before been spotted in the wild. In our view, there is nothing more trustworthy than cash in the bank.
“The dividend is a great sign in terms of the company’s financial strength. Only the rarest of fraudulent companies pays a more than trivial dividend.” – SA Marketplace author Ian Bezek, former analyst at a hedge fund that specialized in shorting Chinese equities
One final risk factor: due to its checkered past, Momo has a domestic reputation as an enabler of China’s illicit sex trade. Sex worker activity on dating apps and other online platforms is not exclusively a Momo problem: as reported by The Brussels Times, a study by France’s Fondation Scelles concluded that criminal prostitution networks across 35 countries are increasingly using apps like Tinder and Facebook for recruitment and solicitation. The Washington Post keyed in on Tinder’s emerging “prostitution problem” as early as 2014, noting that “the world’s oldest profession has been quick to adopt the world’s newest technologies whenever possible.”
Shortly before Momo’s 2014 IPO, the PRC’s official state-run press agency, Xinhua News, slammed the company for promulgating immoral behavior. Ladies, get ready to clutch your pearls: Xinhua’s investigative reporter complained the Momo app had “a large number of photos of seductive women….In these photos, which clearly had been prettified in Photoshop, the women were either wearing bikinis to show off their physiques or taking selfies from angles to emphasize their beauty” (Wall Street Journal paywall).
Momo has been vigilant in cooperating with authorities to combat sex workers and scammers on its platforms. Although it has not been entirely successful in rehabilitating its public image, core Momo has never suffered any official government sanctions other than past media criticism. However, Tantan was suspended from app stores in April 2019 when it got swept up by a Chinese cyber watchdog campaign to clean up the Internet. ZDNet reported that even giants like Baidu and Sohu were targeted for regulatory action. During this time, Tantan’s functionality remained intact for existing users, it was simply not available for download by new users. After an internal review, Tantan returned to app stores two months later.
Management has aggressively been trying to clean up Momo’s public image and investing in antifraud technology. Based on oblique comments in the latest earnings calls, we believe a coordinated interception of suspect user activity in part drove the precipitous decline in 2020 H2 revenues (Wang Li: “…such adjustment was expected to cause severe short term pain in revenues, but it is critical in getting rid of the bad apples that are harmful for the long term healthiness of the business”). While we don’t foresee any immediate threats to cause Momo’s reputation to deteriorate further, the possibility does exist.
Simultaneously, that it’s moving forth from a position of relative notoriety gives Momo a potentially lucrative opportunity to reinvent itself in the eyes of the public. A successful makeover campaign would open up new avenues of growth, such as increased advertiser demand. It would also inject a second wind into Momo’s MAU growth, which appears to have stalled in recent years (VAS revenue surge was entirely due to monetization ramp-up). Finally, given China’s ongoing demographic crisis and declining birth rates, we believe state officials are disincentivized from cracking down too harshly on platforms that facilitate romantic coupling, provided honest efforts are made to comply with local regulations.
Along with an eventual reset of market price to match intrinsic value, Momo investors may benefit from several embedded call options:
- A tender offer. Momo matches all the prerequisites of an attractive acquisition prospect: profitable core business, dominant operator in its market, cash rich balance sheet. For high tech majors, snapping up Momo is the path of lesser resistance to secure a foothold in the dating app market compared to launching a competing product from scratch. Tencent already tried by rolling out no less than 3 separate dating apps back in late 2019: Maohu, Qingliao and Dengyou Jiayou, none of which gained mentionable traction. The Chinese government’s recent antitrust investigations may have a chilling effect on big tech acquisitions in the near term, but we still believe Momo to be a prime buyout candidate. The only prior instances where we’ve witnessed such an asymmetric opportunity in Chinese equities were Sogou at $4 an ADR (contracted to be acquired by Tencent at $9/ADR) and Sina Corp at $32/ADR (taken private by Charles Chao at $43/ADR).
- A major acquisition. The reverse of the catalyst above: instead of being bought by someone, Momo leverages its gargantuan cash hoard to buy someone else. The purchase of Tantan proved Momo’s management to be highly skilled at spotting opportunities both to enrich its current offerings through accretive horizontal integration, and head off potential competitive threats at the same time. Wang Li on the Q3 earnings call: “In terms of capital allocation, one of the other things that we are considering is of course, the M&A opportunities that can strengthen the company’s leadership and build future drivers. I would say that on the M&A front, the company’s approach tends to be fairly prudent in analyzing and evaluating any potential targets. But if we do see opportunities as promising as Tantan, we are going to go in very aggressively without hesitation.”
- A successful turnaround of the livestream business. In our valuation analysis, we assigned a 5-year expiration date to Momo’s still extremely lucrative livestream business. What if we’re wrong? If Momo can execute a successful turnaround on live video service, or even just stabilize the revenue stream to prevent cardiac arrest, it would restore tremendous value given that livestream is responsible for the lion’s share of the company’s present day earnings. Such an event would likely trigger an immediate reversal of fortune on the stock, since investors appear to have left Momo for dead after its disappointing performance in livestream last year. It’s worth noting livestream only faltered in 2020, it still grew like gangbusters in 2019: the chance of a comeback should not be dismissed, especially if Momo can execute on its vision of merging video and social. We are hoping to be pleasantly surprised.
- Tantan achieving profitability. Currently a cash burn operation, Tantan’s potential has yet to be realized. Relative to industry peers in the West, some of whom are also pre-profit, Tantan’s implicit valuation appears markedly discounted in terms of paying subscriber base and total revenues. Tantan’s operating loss margin has been narrowing, from -130% in 2018, to -116% in 2019, to -20% in 2020. Tantan looks on track to achieve profitability in the near future, hitting that milestone would merit a substantial re-rating of the platform’s economic value, and by extension, parent Momo’s market value. Also, Tantan was banned from India (one of its largest overseas markets) last year along with over 200 Chinese apps, ostensibly for national security reasons, but more likely as a digital strike over ongoing border tensions between the two countries. If tensions resolve and the ban is ever lifted, re-entry into the 1.3 billion strong Indian market would materially extend Tantan’s TAM.
“As Tantan with revenue becoming increasingly sizable and bottom line continuing to improve, it’s going to be the new engine for the coming three to five years.” – Wang Li, Q3 2020 earnings call
- Potential 2021 IPO of Soul. Bloomberg’s anonymous sources report Shanghai Renyimen, the company behind Chinese dating app Soul, has confidentially filed for an IPO in anticipation of possibly going public later this year. Disavowing the appearance-focused matchmaking approach of conventional dating apps, Soul matches users algorithmically based on a personality inventory, then mutually unveils photos only after interaction progresses to a certain stage (Tantan offers a similar feature in Flash Chat). Our field research indicates Soul is currently red hot among Chinese millennials/Gen Z in the romance market. If Momo ever has to face a true competitor, we bet it will be Soul. At an anticipated $1 billion plus valuation with less than 20% of Momo’s combined MAUs, and relative to Momo’s $1.2 billion enterprise value, Soul will likely appeal more to high growth/speculative investors. As the only other play in China’s dating app space, trading at a significantly less ambitious valuation, Momo stock may benefit from renewed institutional interest in the industry generated by Soul’s upcoming IPO roadshow.
There is one more growth factor we would be remiss not to mention: compounded organic growth. Sogou was a revenue/market share/IP play, Sina was a sum-of-the-parts play, but as an investment, Momo exceeds both in scope of the opportunity because it is simply a quality business (though presently saddled by an unfortunate reputation). One of its products is truly unique (Lauren Hallahan’s company The Meet Group tried to duplicate the model, branding itself “MOMO of the West”), and the other is a clone of a proven market leader that has itself become a market leader. Momo is also helmed by a capable leadership team that displays that rare combination of fiscal discipline and knowing when to sacrifice short term profits to build a better mousetrap.
Today’s investors are making the grave error of assessing Momo via tunnel vision to be solely a livestreaming story, because for the longest time that’s all there was to the company. Momo is a tricky business for Westerners to understand because it is a category maker with an unconventional narrative. We suspect it will only be a matter of time before the market ceases to anchor on Momo’s legacy revenue streams to price in its future growth levers in core Momo VAS and Tantan. For a sobering look at what happens to a stock when a company’s story changes absent any remarkable transformation in the underlying business, see Apple’s trailing two-year performance.
Thus, Momo investors are being set up for a rare quadruple play: alpha by multiple expansion, alpha by organic growth, alpha by inorganic growth, and alpha by capital return. In the oft-fraught Chinese equities space, Momo stands out as a singular opportunity with bright prospects selling for pennies on the dollar.
“The coming ten years we’ll see a continuous boom of China’s private consumption and it will be gearing up from a goods driven model toward a service and new consumption driven model…The coming decade we’ll also see phenomenal changes and advancements in communication technology and hardware devices. Moreover, with the rising personal income and education level, the world’s highest level of digitalization and increasing focus on individuality, today’s younger generations are becoming increasingly open toward the idea of online dating and broader social products and services providing emotional companionship….It’s quite possible that we will see the cultural inflection point in the dating and social space within the coming decade. As a company that focuses on helping people build new relationships, we stand at a cross-section of all those trends.” – Wang Li, Q4 2020 earnings call
For a contrary perspective from a professional on the other side of our trade, see Spruce Point Capital Management’s 70-page short thesis on Momo published June 2018. There is nothing in that research report we found immediately alarming. The most damning accusations were conjecture, scaffolded by speculative phrasing like “potential,” “suggest,” and “raises the obvious question.”
Additionally, some of Spruce Point’s insights were a bit questionable. For example, working backwards from Momo “top five” agency Beijing Mushang’s SAIC filings, Spruce Point estimated agency contribution to live video revenues to be 46%. They offered this figure as evidence of management willfully misleading investors on the importance of agency partnerships to live video…except in the very same earnings call they cited for their data, Tang Yan transparently disclosed that broadcasters affiliated with agencies “contributed less than 50% of the total revenues from livestreaming service.”
Spruce Point was highly astute in forecasting the impending tribulations that were in store for Momo’s livestream business, but in the almost three years since the report dropped, that part of the thesis has already played out and been fully priced in by the market. Momo was trading at $48.50 at the time of publication. After laying out its bear case against the company, complete with no less than 7 red flags followed by a comprehensive analysis of fundamental challenges, Spruce Point arrived at a mid-range price target of $27.50 an ADR: +81% above last week’s closing price.