The Brief analysis of Momo

Summary

Momo dropped 22.4% from 31.69 (closing price on Dec 04) to 24.58 (closing price on Dec 11). The analyst normally does not believe that Momo’s net income is sustainable (may be inappropriate word choice). After the financial report, the high expense and low growth rate of live streaming become the other reasons for the pessimistic market perspective. I will identify Momo through the analyzing of live streaming and Tantan.

LIVE STREAMING

background

Live streaming is the most important business of Momo. Based on the past three quarters’ financial reports, the revenue of live streaming is 81.16% of total revenue (1189.4m/1465.4m). The CAGR of revenue of Live streaming directly influences the CAGR of Momo’s revenue. The growth of live streaming slowed down in this quarter and will keep a single digit CAGR in next three years. The revenue of Live Streaming is continuous.

Momo’s live streaming is social live streaming. Momo monopolies this unique market and, currently, this market is only profitable in the Chinese market. Different from video game live streaming, celebrity live streaming, and sports or show live streaming, social live streaming provides the better gross margin of revenue to the platform because the users do not follow the specific content or broadcaster. Most contents of social live streaming are UGCs, which means the content is close to zero cost (without operating cost). For the broadcaster who becomes famous, the platform of social live streaming has better bargaining power than other live streaming platforms.

In addition to having the long tail broadcasters, Momo’s live streaming also has the long tail and impulsive user group. A Morgan Stanley’s research describes the scenario and the users pretty well.

“What’s new in this report: 1) Wecomparelivestreaming with Macau: We see fundamental similarities: 1)high revenue concentration in top users,2) rich cash positions, and 3) reliance on junkets/talent agencies. We also note differences: 1) capital intensity, and 2) Momo’s solid VAS and Tantan businesses (growing +100% YoY). We refer to Macau’s EV/EBITDA excluding gross PPE of 8-9x. Live streaming may trade lower in view of higher EPS uncertainty amid competition, lack of dividends,and shorter track record vs. >40 years for casinos globally,2) SOP yields US$30/share: We apply 7x EV/EBITDA for live streaming,2.5x P/GP for VAS (similar to iQiyi), and 5x P/S for Tantan (the same as for Match Group) on our 2020 estimate and discounted back by WACC of 14%.”

However, I do not agree with the conclusion.

Opinion on bearish points 

1) Momo’s live streaming has social fission and a community feature which Macau does not have. The community feature sets the moat and the social fission is the amplifier to enhance the advantage of Momo’s live streaming. Momo’s live streaming is a light asset business with network effect but the business of Macau is not. Thus, Momo’s live streaming has higher Roe and more consistent cash flow than those of Macau. The logic of Momo’s live streaming is fundamentally different than that of Macau.

2) Based on Maslow’s hierarchy of needs, people have five levels of needs. In current China, most people’s safety needs were satisfied. They seek (1)Love/belonging needs and (2)esteem needs, which are the next level of safety needs. The Big R user represents a small portion of users, but who generate the most revenue. The satisfaction of spiritual needs is an important reason users spend time and money on Momo’s live streaming. In the last 30 years, China has had a lot of rich people without a good education. They are not interested in literature or hobbies. Momo is an appropriate platform for them. Their vanities and needs are satisfied due to rewarding the broadcaster and spending money to get priority status. In Chinese culture, people believe that being respected and admired is the most significant part of success. This feeling is addictive. The more money that is spent leads to more respect and privileges, which in turn leads to more addictive feelings. The vanity or honor is another important reason. Momo has a lot of competitions between the broadcasters. It is not only about the broadcaster but also about the people behind the broadcaster. The impulsive spending during the competition is ridiculous, but it is human nature. Due to the Chinese culture, the unique feature of Momo the impulsive spending in Momo live has more dimensions than that of Macau casino.

3) The spending on physiological needs and safety needs is limited, price sensitive, and rational. This kind of spending is cyclicality and influenced by the Macroeconomy. For example, I only need a certain amount of food to fill my stomach, and I do not want to spend $1000 just to fill my stomach. The spending on Love and belonging needs, esteem needs, and the need for self-actualization are unlimited, immeasurable, and impulsive. For example, I go on a date with a girl in a Michelin star restaurant. I may spend more $1000 on a salad. The salad certainly does not value that much, but the good impression of the girl has more intrinsic value.

Most revenues of Momo come from the second type spending. Thus, the Macroeconomy recession does not influence the revenue of live streaming.

Based on 1 and 2, more dimensions of impulsive spending, the special type spending of the users, and the Chinese culture are the critical reason that the revenue of Momo live streaming will consistently slowly increase. Moreover, the slowly increasing does not need the extra input, since the live streaming has already formed the ecosystem. Which means that Momo live streaming will consistently generate at least 320m (80% of total net income (420m) ) free cash flow.

Another bearish point is that DouYin and Volcano (huoshan) live has the advantage to take Momo’s market share and increases the intensity of live streaming market. Broadcasters have more choices and better bargain power which will reduce Momo’s gross profit margin and revenue. However, It is wrong.

  1. The content of DouYin’s live streaming is similar to Momo’s and Volcano’s. However, the users of Momo have the most loyalty and are more impulsive to spend money.
    1. In normal live streaming platform, the users or audience do not care about other audience members; like the audience in the theater, the users of normal live streaming watch and leave. However, the users of Momo’s social live streaming enjoy the environment more, especially for the “rich guys”. Most Broadcasters have their own profile and publish their daily life(similar to Instagram.
    2. The self-generated traffic and long tail broadcaster group give MOMO the advantage of expense and a superior gross profit margin.
    3. The most threatening of Momo was Inke.
    4. Momo live streaming applies to the social networking site law, which more people use causes the platform more valuable which in turn lead more people to use.
    5. Momo is working with agencies to produce high-quality broadcasters, which can drive another burst of growth. 

Evaluation model of Momo’s Live streaming

I disagree with Morgan Stanley’s Claim:

“Live streaming may not trade above 8-9x EV/EBITDA in the long term: ……We reference the EV/EBITDA excluding gross PPE (because live streaming business has no material assets) of four Macau companies (Wynn, Galaxy, MGM, and Sands) at 8-9x as shown in Exhibit 7, based on historical PPE (2017) and net debt (CASH) (1H18).”

There is no benchmarking to Momo’s unique social live streaming. I use the reciprocal of twice of interest of long-term nation bonds or Risk-free rate of return as the PE, which is 1/ (3%*2). Momo’s live streaming should be around 15-18pe in long term. The market will aware in the future, Momo’s live streaming is a consistent cash machine which equals to a developed Dow Jones Industrial company with consistent slowly CAGR of net income. 

Why long Momo’s live streaming

  1. Live streaming is an emerging industry. In the future, with the popularization of portable smart devices (VR, AR, smartwatch, smart glass, IOT) and the growth of the mobile internet generation (in the aspect of both ages and amount of numbers), Live streaming will become the daily habit for a significant portion of the world population. Like watching TV shows and going to movie theaters, watching live streaming will be more usual and frequent. Live streaming broadcasters will be more popular and common jobs or part-time jobs (this because of the trend of over-Amusing, I will write another article talking about it).
  2. Momo is one of a few platforms, which can genetically utilize the socially live streaming (FB is another one) to efficiently generates cash flow with the moat.

Tantan 

Tantan is not good business. However, Momo has to buy Tantan because if Momo wants to build an online social entertainment kingdom and monopoly monopolize the market, the best way is to build an app-matrix (similar to Instagram, WhatsApp, Facebook, and Messager). Tantan discovery and monopoly one niche market in Momo’s market, so Momo has to buy it.

The female user has better user experience in Tantan. There is a virtuous circle which more female users will cause more male users. The way Tantan to monetize is similar to tinder, which means there is a ceiling for its revenue. Tantan has weak viscosity of users and cyclical using time for most individuals. Users may quit the app due to finding a relationship or feeling boring. The new dating app also enters the market with a different angle, such as Soul. The short videos, the mobile games, and other entertainments set a ceiling to Tantan. Tantan is high percent monopoly in the direct dating business but hard to break the ceiling. The gift center and advertisement may largely improve the ARPU. Based on information from bbs, Tantan has closely 24m (dollar) revenue in Q3. Since there are not a lot of information, it is hard to calculate the CAGR of ARPU and the revenue of Tantan.

Tantan’s DAU will hit the ceiling. In order to improve the total revenue, Tantan needs to adding more privilege to paying users, which may hurt the DAU.
Tantan’s DAU will hit the ceiling. In order to improve the total revenue, Tantan needs to adding more privilege to paying users, which may hurt the DAU.

VAS of Momo

The dating business of Momo is a low-quality Tantan adding a social game center. The current business of the Momo app will have single digit CAGR of net income with consistent ROE. The secret is the population live in 3-tier and below cities, and let us call it small town population.

The population of each tier
From prospectus of QTT

The small town population is around 1b but the average number of mobile devices per Capita is 0.48, which means one person averagely has 0.48 smart devices. Assuming, in the future, the number increase to 0.8, the capacity of the market will increase 50%.

The popular media and the users from 2-tier and above cities believe Momo is low and outmoded. However, the dating business of Momo perfectly meets the demand of small town population. Different from the population in 2-tier and above cities, the small town population is less educated, less aggressive, and more social needs.

Valuation 

The net income of Momo for 2018 financial year should be close to 420m with a weak Q4 (0% increase QoQ). The live streaming is given 15-18 pe. The VAS is benchmarking Match group. In 2018, Q1-Q3, there is 97% revenue of Match group from VAS (direct revenue) (1231.9/1272.5). Based on Zacks, The Match group is given 35 TTM pe currently. The lowest TTM pe of Match group was around 20 in 2016. I guess the low pe is because of the bearish prediction of growth (welcome feed me some history). Thus, The VAS business is given TTM 20-30pe.

Live streaming

In the next five year, the live streaming business’s revenue will have 10% – 20% CAGR.


Revenue (million usd) YoY QoQ MAU (M) QoQ of MAU paying users (M) QoQ Paying users rate ARPPU QoQ
18Q3 407 34% -1% 110.5 2.3%




18Q2 411 58% 10% 108.0 4.5% 4.6 4.5% 4.3% 89.3 4.8%
18Q1 375 76% 14% 103.3 4.2% 4.4 2.3% 4.3% 85.25 11.8%
17Q4 328 68% 8% 99.1 5.0% 4.3 4.9% 4.3% 76.28 3.4%
17Q3 303 179% 17% 94.4 3.4% 4.1 0.0% 4.3% 73.80 16.7%
17Q2 259 348% 22% 91.3 7.2% 4.1 0.0% 4.5% 63.27 22.0%
17Q1 213 1265% 9% 85.2 5.1% 4.1 17.1% 4.8% 51.85 -6.9%
16Q4 195

81.1 4.8% 3.5 34.6% 4.3% 55.67 33.3%
16Q3 109

77.4 3.5% 2.6 100.0% 3.4% 41.77 -6.2%
16Q2 58

74.8 3.5% 1.3
1.7% 44.55
16Q1 16

72.3





The revenue of Live streaming business of Momo should be 2.45b – 3.79b.

Since the company did not disclose the gross profit margin of the live streaming business. Here is a rough calculation. All six quarters through 17Q1 to 18Q2, 80% total revenue of company come from the Live streaming business. During 17Q1 to 18Q2, the gross profit margins are around 45%-55%. Other 20% revenue, included VAS and advertising, have a higher gross profit margin. YY’s live streaming business has around 35% to 40%. Since social live streaming is more efficiently, the gross profit margin of Momo’s live streaming business should around 40% to 45% currently. However, the growth of revenue mostly is driven by the agency of broadcasters in the next few years, so the gross profit margin should decrease to the same level as YY (the platform already full work with agencies), around 35%-40%. Therefore, in 2023, the gross profit of the live streaming business is 857.4m – 1513m. 

VAS, adv, game, and other services

The valuation of Tantan and dating business of Momo can be calculated in two ways. Any precise calculation of Tantan is the lie because there are too many undetermined variables. 

  1.   Use Tinder as the benchmark. The revenue of Tinder is 800m in 2018.
  2. Use the Users * Paying rate * ARPPU.
2018Q3 VAS (direct revenue) Paying ARPPU
Match group (NA) 234m 4.28m 54 USD
Momo, Tantan 84m 9.00m 9.33 USD

This table displays the potential of Tantan. Currently, the sum of the price of all the privileges is less than 100RMB (15 USD) per month. The price of privileges of Tinder is close to 30 USD per month. (Careful: the data is not Tinder but MTCH and is not only Tantan but Tantan plus Momo)

  1. The gift system, One gift can be more than 100 RMB. The gift system and super unfair privilege give the rich people the opportunity to attract others. Thus, not only handsome and interesting one is popular, the person who ugly and boring also can attract others by money. It not only increases more high-valued user but also generates another dimension of dating.
  2. The growth VAS due to the growth of paying user.
  3. The Ad.
  4. The expansion of Momo in tier-3 and below cities
  5. The expansion of Tantan in the overseas

Based on the VAS business (97% total revenue) of Match group, the VAS business has around 75% to 85% gross margin. The least gross profit of VAS is 600m. 

Based on the financial report of Momo before 2016Q3 (Momo did not start live streaming yet), the gross profit margin is around 60%. The worse situation is mobile marketing, mobile games, and other services have zero increase, which is impossible, and the revenue of 2023 will be 128m (2018 Q1-Q3 + 2017 Q4). The gross profit is 76.8m.

I open the position 

The least total gross profit is 76.8m+600m+857.4m=1534.2m. Considering Momo as a value stock with consistent cash flow yearly, I use the reciprocal of twice of interest of long-term nation bonds as the PE, which is 1/ (3%*2) – 1/(2%*2). Momo should be around 15-25 pe in long term. The ratio of net income to gross profit is around 50%, so the least net income of Momo is 767.1m. The least valuation of Momo is around 11.5b to 19.1b, and the dividend behavior and bull market may cause higher the PE. Based on the closing price of Dec 13, the market cap of Momo is 5.26b. Buying Momo now, next five years, the compound annual return of investing(CAROI) is 16.95% – 29.5%. Since I use the least number of most variable, the deal has the safety margin. 

Attention:

Momo’s intrinsic value cannot be accurately calculated because there are too many undetermined variables, but through the logical deduction bolstered by conservative calculation, the conclusion is proved to be highly probable.

Risk

  1. The policy risk. Momo is the target of government because of its bad rep. If Momo does not regulate well, some broadcaster may cause trouble. The policy risk is fatal short-term for the company financially. However, it will not hurt the company long term.
  2. Tantan cannot monopoly the stranger social market. The emerging apps may split users time. Since users only give an amount of certain time to stranger social media, Tantan’s growth rate may slow down.
  3. When I analyze Momo financially, I will leave close 500m for the buyout. (similar situation as Tantan)

http://pdf.dfcfw.com/pdf/H3_AP201812071263965007_1.pdf

Disclosure: I am/we are long MOMO.

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