Why Is China's Momo Inc. Stock Soaring Today?
Zacks Investment Research | Feb 22, 2018 11:40PM ET
Shares of Momo Inc. (NASDAQ:MOMO) soared more than 12% in morning trading Friday after the Chinese instant messaging company acquired Tantan, China’s top dating application, in an all-cash deal valued at more than $600 million.
Such a major deal clearly signals that Momo is looking to diversify its core business in an effort to compete against Tencent’s (OTC:TCEHY) WeChat, the clear leader in China’s instant messaging market.
“Our core position will continue to center on social networking and this acquisition enriches our product line in the social space,” said Momo CEO Yan Tang. “After the acquisition, the Tantan team will continue to operate the mobile apps under the Tantan brand with our full support.”
Labelled as the “Tinder of China,” Tantan claims to have created 5 billion matches since launching in 2015. The app never disclosed its private valuation, although we do know that it has raised about $120 million—including $70 million in a funding round as recently as last year.
For Tantan, the deal presents the young company with a unique opportunity to scale while still operating under its own banner.
“The acquisition is a critical strategic upgrade to cover a greater range of user demographics and needs, and build up a larger social networking market through complementary businesses and strategic synergy. We are very confident in our future development,” said Tantan CEO Yu Wang.
Momo shares opened higher and continued to climb in morning trading Friday, reaching an intraday high of $34.50 shortly after the opening of the U.S. markets. The stock is now up nearly 35% over the past year, although it is still a long way off the 52-week high it reached in August.
Momo’s failure to generate much momentum actually presents a unique value opportunity in the Chinese internet space. While many of its peers—including Line Corporation (NYSE:LN) and Weibo Corporation (NASDAQ:WB) —trade with sky-high valuations, Momo is currently sporting a P/E of just 13.9.
But Momo is still a stock with explosive growth potential. Our consensus estimates are calling for the company to conclude its fiscal 2017 with full-year earnings growth of 97.7%, followed up by an additional bottom-line expansion of 28.2% in the upcoming fiscal year.
Momo is currently sporting a Zacks Rank #3 (Hold), as well as an “A” grade for Growth in our Style Scores system.
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