Hello Group (NASDAQ: MOMO), a prominent figure in China’s social media landscape, offers interaction platforms through its main applications MOMO and Tantan, alongside other niche apps targeting specific demographics globally.
In early 2023, the group’s relatively low valuation hinted at a promising risk/reward scenario, anticipating a turnaround in user growth and revenue.
However, the financial results for FY2023, unveiled in mid-March 2024, painted a less favourable picture, leading to a reassessment of the company as an investment.
Revisiting the Investment Thesis
User Base and Revenue Challenges: The latest financial disclosures indicate a persistent decline in the user base, directly impacting the revenue stream. This downturn has forced a re-evaluation of the company’s future, particularly concerning dividends, which are likely to be adjusted downward in response to these pressures.
Operational Shrinking Phase: These developments suggest Hello Group may be entering a deceleration phase within its corporate lifecycle, characterized by contracting yet still profitable operations. This phase poses significant questions about the company’s long-term viability and strategic direction.
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Application Performance and Strategic Decisions
User Attrition Concerns: Both MOMO and Tantan have experienced a decline in users, despite efforts to curb this trend, particularly after Tantan’s acquisition in 2018 for $800 million.
The company’s first-quarter guidance for 2024 anticipates a revenue decrease of 9.5% to 13.5% year-over-year, signaling ongoing user loss and revenue challenges.
Marketing Expenditure Reduction: To safeguard profitability, Hello Group has progressively reduced its sales and marketing (S&M) expenses, a move that has paralleled a decline in revenues.
This reduction in investment could further impact the platform’s content quality and user engagement, potentially exacerbating the decline in users and revenues.
Corporate Governance and Capital Allocation
Questionable Acquisitions and Decisions: The purchase of a significant property in September 2023, amidst a shrinking workforce, raises concerns about capital allocation and corporate governance practices.
Additionally, the employment of key executives with personal ties to the leadership has drawn scrutiny, highlighting potential conflicts of interest that could detract from shareholder value.
Financial Valuation and Outlook
Market Valuation Concerns: Despite a seemingly attractive Price-to-earnings ratio and Earnings Yield, the underlying reasons for MOMO’s low valuation warrant caution.
The announced dividend cut and a sizable buy-back program underscore the management’s efforts to return value to shareholders amidst declining financial performance.
Intrinsic Valuation Analysis: Utilizing a dividend discount model adjusted for expected dividend cuts and the buy-back program, alongside a conservative estimate of future earnings decline, suggests that MOMO’s current market valuation is closely aligned with its intrinsic value.
This analysis, grounded in management’s revenue expectations and strategic cost-cutting measures, implies that the stock may be fairly valued given the current challenges.
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Reversing Current Trends
Hello Group faces significant hurdles in reversing the current trends of user attrition and revenue decline.
While strategic expense management and shareholder return initiatives provide some support, the broader strategic challenges and governance issues underscore the need for cautious investment consideration.
The company’s ability to navigate this complex landscape will be critical in determining its long-term position in the competitive social media market.
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Joel Gbolade is a seasoned financial writer with over seven years of experience in freelance content creation. Specializing in the financial niche and stock market, he has crafted engaging content for numerous websites. His background in technology extends to data processing and computer proficiency, enriching his comprehensive skill set in the financial realm.
