Mediaboss Marketing

1. Summary

We believe Momo (NASDAQ:MOMO) created a new favorable business model, a social live broadcasting app which combined built-in nearby social networking functions with live broadcasting. The new business model offered a much better ARPU than the traditional live broadcasting platform. If MOMO's MAU reaches 100 million or the ARPU reaches $4 in 2017, we believe its market capitalization could reach $10 billion with a high probability. However, if MOMO loses growth in both MAU and ARPU, it would reveal the company is overvalued.

2. What will Q1 earnings be like?

As of April 26th, the Wall Street analysts' consensus estimates for the 1st quarter were as follows:

Modeling.AI has been working hard with abundant data sources. Based on the data that we have collected so far, all of our models predict that MOMO will beat both the Rev and EPS 16Q4 consensus with a very high probability.

Our model prediction data

Q1 will be a great quarter again for MOMO because the MAU and ARPU will continually increase, and the growth of revenue will keep the momentum as well. The most amazing part of the Q1 report may be the increase of ARPU and MAU. MOMO had incredibly good ARPU in 16Q4, $3, which was the highest ARPU in the live broadcasting industry in China. Therefore, the ARPU of Q1 will be greater than $3 with a very high probability. Considering the ARPU's behavior, MOMO's live broadcasting is not the same as the traditional one, whose ARPU is only around $2.3 and is getting to the bottleneck. However, we have not seen an obvious slowdown in the company's ARPU growth rate. MOMO would be a pretty attractive investment object if its ARPU continues growing at a reasonable rate.

Based on our data, the first month of Q2 was great in terms of DAU and ARPU. If the company can somehow maintain the momentum in May and June, Q2 will be a splendid quarter once again.

We used to think of Momo as a social networking app. However, today most people classify and recognize it as a live broadcasting app because MOMO makes about 80% of its revenue from the live broadcasting business and literally has the highest ARPU in the market of live broadcasting in China. Remarkably, this figure is still growing. The company officially started its live broadcasting service in 2016 Q1. In the very first quarter after launching the live broadcasting service, 30% of MOMO's revenues were from live broadcasting and ARPU was $0.7. After only one quarter, the revenue figures and ARPU rose to 60% and $1.32 respectively. In the latest official report for Q4 2016, revenues and ARPU were at 80% and $3 respectively. We assume the figures would reach 82.3% and $3.1 in the upcoming earnings report. As its live broadcasting service soared these years, MOMO cashing in on this opportunity can bring a huge benefit to its revenues and social functions.

Data from the company's earnings reports. Chart created by Modeling.AI

Therefore, we think MOMO may create a new business model in the social networking industry: live broadcasting mixed with nearby social application, which we may call "live social broadcasting." This new business model is actually quite different from the traditional social business model and the live broadcasting business model. We will talk more about live social broadcasting in details in section 3.

3. MAU and ARPU

After a year and half of conspicuous growth in terms of monthly active users (MAU), this metric stopped growing in the 3rd and 4th quarters of 2015, which caused concern with investors.

However, from the 1st quarter of 2016, MOMO's MAU regained its growth, with an average quarterly growth of 3.8%. In the 4th quarter 2016, the MAU had an impressive growth rate of 4.78%, and we expect to see growth continue in the 1st quarter of 2017. Based on our data, it appears that this figure will grow in the first month of the 2nd quarter. If MOMO can somehow maintain the momentum, the 2nd quarter will be another successful quarter for the company.

Compared to other live broadcasting apps in China, MOMO has been leading in terms of revenues and ARPU since it first launched the nearby live broadcasting function in April 2016. We believe the company has the ability to generate much more revenue per user than its competitors, due to its unique business model.

For example, in the last three quarters, YY ARPU figures were $2.1, $2 and $2.35. In the company's latest publicly available financial report, we learned that the ARPU was already over $3. In addition, ARPU and MAU were continuing to increase in April, according to the analysis by Modeling.AI. Our models suggested ARPU and MAU would be $3.1 million and 82.3 million respectively in Q1 2016. MOMO launched the live service in 2016 Q1, and then the ARPU was equivalent as YY after only two quarters. This trend continues. These figures will be better in the near future if MOMO can keep up the momentum.

Based on our calculations, ARPU could get close to $4 later this year, which would be the highest ever in the Chinese live broadcasting market.

Data from the company's earnings reports. Chart created by Modeling.AI

4. Social App or Live Broadcasting App?

As mentioned earlier, we believe MOMO created a new business model of "live social broadcasting." Before launching the live service, many users simply took advantage of the "Nearby" function and moved on to other social apps such as WeChat (OTCPK:TCEHY) once they became acquainted with other users in MOMO, which could be the main reason why MOMO's MAU stopped growing since Q3 2015. After the live broadcasting service was released, a "chemical reaction" magically occurred between MOMO's existing functions such as "See nearby people" and live broadcasting. People tended to watch nearby live broadcasting and were willing to spend much more time and money on MOMO rather than other live broadcasting platforms. The MAU started rebounding and the ARPU soared suddenly.

5. The Future and Valuation Methods

5.1 The Future of the Live Broadcasting Industry in China

Data from the company's earnings reports. Chart created by Modeling.AI

Data from Analysys International. Chart created by Modeling.AI

The overall size of the live broadcasting market has continued to increase in China since 2016. The market has indeed become much more mature than it was in 2016. We believe the total market size of live broadcasting will continue to grow in the future. As the chart shows, it will reach approximately 15 billion RMB in 2017, a growth rate of 60% year over year from 2016. By 2020, the size will probably touch an astonishing 60 billion RMB.

The rapid growth of the live broadcasting business was mainly a result of the reduction in mobile data fees. As the price of mobile data has gone down, the number of 4G mobile users has grown in China. In February 2016, there were only 484 million 4G users in the country, but a year later the number was 806 million - a year-over-year growth rate of 66%.

While 4G data became cheaper, people actually tended to use more data. In 2016, Chinese mobile users used 0.84 GB of 4G mobile data on average, and this figure was predicted to reach 1.6 GB in 2017, representing a 90% year-over-year growth rate. According to data forecasted by the China Academy of Information and Communication Technology (CAICT), mobile data usage would be 5.4 GB per user by 2020.

At the end of 2016, MOMO's ARPU was greater than $3. We believe its live broadcasting business will definitely benefit from accelerated development of the 4GB mobile network. Therefore, MOMO is obviously on the fast lane of the live broadcasting industry in China.

Data from Analysys International. Chart created by Modeling.AI

Data from the China Academy of Information and Communication Technology (CAICT). Chart created by Modeling.AI

5.2 Valuation

5.2.1 Growth

Data from Thomson Reuters. Table created by Modeling.AI

At the moment, the P/E ratio (TTM) for MOMO is about 50 times, which likely causes concern about whether the ratio is too expensive in comparison with competitors. Yet, the key factor to determine whether MOMO is overvalued or not is its future growth.

Data from Thomson Reuters. Table created by Modeling.AI

As the table shows, the company had impressive growth in revenues and EPS in 2016. Revenues and EPS grew by 413% and 963% year over year, respectively. What about 2017? The current analyst consensus is for $1142 million in revenues and $1.42 in EPS for 2017. If the analysts are right, MOMO will have 107% growth in revenues and 84% in EPS in 2017 based on historical figures. The PEG ratio would be an impressive 0.69 for 2017 and 0.9 in 2018. When you take growth into consideration, MOMO is actually not that expensive if the company's business can keep growing as we expect.

5.2.2 Risks

As we discussed in section 2, MOMO's robust revenue growth was primarily driven by growth in MAU and ARPU. We believe the company's 2017 revenues will beat Wall Street's consensus of $1142 million with ease if the two factors can keep up the current pace or even slow down somewhat.

That being said, sluggish growth in MAU or ARPU would have a substantial impact on the company. Therefore, these key indicators should be monitored in a timely and precise manner. With cutting-edge artificial intelligence and Big Data technologies, Modeling.AI can offer real-time operational data monitor services accurately and professionally to reduce the investment risk significantly.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Here is the original post:
Momo: The Next Social Networking App Giant? - Seeking Alpha