Momo Inc. – Livestreaming (A sustainable new form of entertainment or fad?)

A little over a month ago on 14 Dec 17, I did a short pitch to a group of friends on Momo Inc. as a potential investment. Momo is often called the Tinder of China. It started out as a location-based dating app but has since morphed into a livestreaming platform and it’s this business of livestreaming that makes Momo particularly interesting.

Origin of idea 

I first came across Momo in early 2016 while reading the excellent newsletter I subscribe to – Value Investor Insight (“VII”), Feb 2016 issue. Momo was pitched by FM First Hong Kong Fund in that VII issue and it was a special situation idea hinging on the publicly announced plan to buyout shareholders and relist Momo in China instead of the US. At the time the VII issue was published, Momo’s stock price on NASDAQ was about $12 and the buyout offer price was $18.90.

It piqued my interest enough to check the 10K but I was never big on special situations so I eventually passed. I did remember revenues growing like weeds but overall, the company was unprofitable.

Sometime in Nov 2016, a friend mentioned in passing about a company, YY Inc., a livestreaming platform which allows patrons to gift entertainers with virtual gifts that are exchangable for cash.  I checked it out almost immediately and found the business model interesting, quite different as compared to the western model of video content creators and platforms relying on advertising as their main source of revenue. What made the situation even better was the low valuation given the crazy amount of cash generation and growth rates. At that point, YY was generating hundreds of millions in free cash flow (USD), had hundreds of millions in net cash, and was trading at an EV/FCF of somewhere around 12-15x if my memory serves me right. I started to invest in YY and started to understand a little more about the livestreaming industry.

Coming back to Momo, at that point in late 2016, it still wasn’t attractive to me though revenue growth rates were high – much higher than YY – I felt that cash flow generation had not caught up with the valuation the price demanded. By that time, Momo’s livestreaming business was in full swing and had eclipsed it’s original business of being a dating app.

What changed

In Nov/Dec, Momo’s stock price fell more than 20% on fears that growth has slowed. On a sequential quarter basis, growth had indeed slowed as the number of paying customers for the livestreaming services stagnated. In fact, by the time I got interested, the stock price had roughly halved from the peak of US$45 reached in August 2017.

I felt that may have created a buying opportunity and revisited the situation. This time, at least optically, Momo’s valuation started to look interesting.

What I think about Momo

I’ve taken a contrarian view towards Momo, which is essentially a bet against the market at large, and started to invest in Momo in late Nov 17.

I’ve uploaded the Momo pitch I made to friends here for reference.