I don’t typically like to measure investment returns of a stock so soon after taking a position. However, there was an interesting corporate development about 2 weeks ago which I deserves a quick update.
So far, MOMO has worked out relatively well. I started accumulating MOMO at around US$25 and dollar cost averaged up and down along the way. It last traded at US$32.89 on Friday. Overall, while the position is up just 14%, I believe MOMO is still a good investment prospect.
Acquisition of TanTan
About 2 weeks ago, MOMO announced that it acquired TanTan, a Chinese Tinder equivalent for about US$700 million, of which the bulk will be paid in cash. MOMO had about US$950 million in cash and short term investments as at 31 Dec 17 so while the acquisition is certainly going to make a dent in its war chest, MOMO can well afford it. Better that the cash is deployed within a space it is highly familiar with than left fallowing to earn miserable interest on.
Unfortunately, there hasn’t been much details such as TanTan’s revenue, user base or profitability announced yet. TanTan was founded only in 2015. Not bad for the founders and investors of a company that’s barely 3 years old. Can’t be sure if it’s going to turn out great for MOMO with the US$700 million splashed on TanTan but I believe the acquisition certainly makes sense.
Roll it up like IAC/Match
The deal reminds me of IAC, listed in the US, which spun off Match not too long ago. Match is the holding company of dating platforms, which not only includes its own namesake brand but also Tinder, OKCupid, Plenty of Fish and several others which dominate the dating platform market. In other words, Match’s roll up strategy means it holds a near-monopoly in the US. From what I’ve checked out online, it appears that TanTan and MOMO are neck to neck as the top dating apps in China.
What I think of the acquisition
In a nutshell, I think it’s a good move.
What’s really interesting here is that although MOMO started off as a dating app, the real cash gusher is the livestreaming business it diversified into about 2-3 years ago. The US$950 million in cash is probably entirely due to the profits from the livestreaming business. There’s plenty of competition in the livestreaming space, including YY Inc which I also own, and MOMO may have some concerns on how it’s going to solidify it’s position in the livestreaming space. An interesting tidbit is that YY owns a part of TanTan and its selling out to MOMO. Quite a bit of interesting/incestuous relationships going on here.
My thoughts are that MOMO is utilising the massive cash generated from livestreaming to consolidate its lead and position in the dating app space, which I believe is stronger than it’s current position in the livestreaming space. The irony is that MOMO’s less profitable business is the one with a stronger competitive position in. I doubt TanTan is profitable at this point or if it is, just barely.
That begs the question – Instead of focusing on the more profitable livestreaming business that has a weaker competitive position, is MOMO throwing good money after bad on dating apps that are barely profitable but which it has a stronger competitive position in? Looking at how Match turned out with its near-monopoloy portfolio of dating apps, I am of the opinion this is a good move. Investing in a space where you are already close or are at number one when your moat is wide given the network effects, and will be wider thereafter, is unlikely to be a bad move, unless you grossly overpay for it. The acquisition will without doubt, gives MOMO a much wider lead as the most dominant player in the dating platform space. On whether MOMO overpaid, I can’t be sure, given the lack of information but I’ll give management benefit of the doubt and there’s real comfort it isn’t paid taking on debt and little shares were issued.
I don’t think livestreaming is a fad. I see it as a new form of entertainment, like how people consume videos on YouTube or Netflix. If I turn out to be dead wrong and livestreaming is indeed a fad, MOMO’s dating platform dominance and potential roll up strategy in the space are going to be a great buffer. At this point in time, I doubt anyone in this day and age is going to call online dating a fad.
What I’m going to do with MOMO
The short answer is I’m going to hold on to it and see how it plays out, particularly checking out next quarter’s filings which will definitely elaborate more on the acquisition. Even without the TanTan acquisition, with MOMO’s growth rates just from livestreaming and the moat it has built up in that space, I would argue MOMO is at the inexpensive to at the most, fair value range.
If MOMO truly becomes the Match of China, backed by a livestreaming cash engine used to fuel its rampage in snatching up dating platform rivals, MOMO will likely be be worth much more than its current price today. From how Match has monetised its dating platforms as they achieved scale, my opinion is that MOMO won’t have too much trouble doing the same at some point in the future even if their portfolio isn’t yet profitable now.