- Not long ago, MOMO was returning 35% of bottom line profit off its equity.
- Although profitability has dropped significantly, the share price has lost almost 60% from its peak.
- An upturn looks like is on the cards here. A profitable firm with buckets of cash can only get so cheap.
In this article, we will go through Hello Group’s (MOMO) numbers which are quite revealing really especially considering the present valuation of the company. First though, we go back a couple of years to get some context. At the end of 2019, Hello Group Inc. reported approximately $2.44 billion in sales on the income statement. Shares finished out the year well over $30 a share. This was the highest annual top-line number in MOMO’s short history. At present, sales over a trailing twelve-month average come in at approximately 2.27 billion in US dollars. This means trailing sales are down approximately 7.5% at present compared to that fiscal 2019 year-end number. In local currency, the decline comes in at 13.6% due to strengthening of the US dollar versus the renminbi over the past 18 months or so.
Although negative sales growth is very much front and centre in MOMO’s financials at present, with shares currently trading around the $12.75 mark, the question must be asked whether the 58% collapse in the share price over this time period has really been warranted. Whereas many companies witnessed a spike in their respective share prices from March onward last year, MOMO never recovered and presently is trading for pennies on the dollar.
We have covered MOMO in the past and have liked what we have seen. We acknowledge that margins have been on the wane in recent times but some context is needed here. Why? Because MOMO’s net profit margin currently comes in at 13.8% over a trailing annual average. This remains lightyears ahead of the average in this sector. Whereas bears may be focused on the poor growth rates in recent times, we believe earnings growth only paints a partial picture of MOMO’s profitability. Therefore, with shares trading at multi-year oversold levels, let’s delve into some of MOMO’s profitability metrics starting with its return on equity.
This key metric is a read on MOMO’s profitability with respect to its equity. Although this metric came in at a whopping 37%+ at the back end of fiscal 2017, the present trailing number still comes in at a very respectable 14.24%. Suffice it to say, instead of looking at how less returns have been extracted from company equity in recent times, we like to compare the metric to peers in the industry. For example, the sector on average is earning approximately 8.5% off its equity so MOMO continues to have a clear advantage here.
Another excellent way to see how much profits a company is generating is by looking at how much earnings are being returned off its assets. The reason being the ROA metric does not take into account the company’s debts whereas ROE does. Over a trailing twelve-month average, MOMO’s return on assets tops 9% whereas the average company in this sector only returns 2.5% per year off its asset base. Suffice it to say, despite the above-mentioned decline in MOMO’s profitability, its assets and equity are still returning very healthy profits which is obviously encouraging going forward for shareholders.
MOMO obviously has a distinct advantage over the sector in general in that the firm remains fully able to generate positive earnings and cash flow. The other side of the profitability coin is how good management can allocate that very same cash flow. This brings us to the company’s ROIC, or return on invested capital, and there are two main ways a company can invest its capital. MOMO can turn over its cash flow quickly (through short-term investments) or can focus on increasing core earnings. MOMO’s present ROIC number tops 9% which is still lightyears ahead of the sector in general.
Suffice it to say, when a company can report these levels of profitability over the competition, it becomes evident that the company to a large degree controls its market. This brings us to the valuation as we believe ROIC percentages play a big role when valuing a company. MOMO’s book multiple as well as its sales multiple are currently trading for just a smidgin above book value. This seems ludicrous when one considers the company’s cash position on the balance sheet as well as its ROE, ROA and ROIC numbers.
We though remain focused on net worth which continues to rise. In fact, as long as the company can continue to generate similar levels of profitability, then consistent investments will continue to be made which will result in rising shareholder equity over time.
Therefore, to sum up, when one takes into account MOMO’s profitability, steep oversold conditions, valuation as well as rising net worth, we continue to believe there is little downside in this name. We look forward to continued coverage.
Author: Individual Trader, Seeking Alpha