For about four years, China’s Momo Inc. bumbled along as yet another dating app provider. Then something happened to make even the world’s biggest university endowment swipe right.
Similar to Tinder, Momo offered users the chance to find people nearby, check out their pics and profiles, and make a choice whether to pass or play. It wasn’t a bad business. But it wasn’t a good one.
While sales grew at triple-digit percentages, Momo’s 2014 full-year loss almost tripled to $25.4 million and the company managed to hit a profit only in the first quarter of 2015. The revenue model was the same as for most dating apps: Charge the more eager lonely hearts a subscription fee to get premium access to their intended, and supplement that with advertising. Momo threw in mobile games to help juice revenue.
By the time its American depositary receipts were listed on Nasdaq in December 2014 at $13.50 apiece, 64 percent of quarterly revenue came from memberships, 23 percent from games, and the rest from ads and other items.
The turnaround came when chairman, CEO and co-founder Yan Tang discovered video. At first, in the third quarter of 2015, he allowed pre-selected performers to broadcast live concerts. Then in March and April 2016 he became more pragmatic, launching a broadcast app call Hani and opening up live video to everyone.
Suddenly Momo had a real live YouTube on its hands, with wannabe pop stars signing up to perform in front of thousands of strangers. Unlike YouTube, the revenue share is direct. Audiences pay to send virtual gifts to performers or to access interactive items — you can put digital rabbit ears on the singer, for example — and Momo splits the sale. The demographics are clear-cut: Young females make up the lion’s share of popular broadcasters, and men account for most of the paying audience.
From $15.6 million in sales for the March quarter last year, live video rocketed to $57.9 million three months later — accounting for 58 percent of total revenue. Last quarter that figure stood at $212.6 million, helping the company post $81.2 million in net income.
This model isn’t unique to Momo. YY Inc. has a similar business with higher revenue. The difference is that Momo has more users and more time spent on mobile devices, and a greater proportion of those use iPhones (with such customers more likely to splurge on tips for performers), according to Bloomberg Intelligence analysts Michelle Ma and Sam Cheung. That gives Momo greater upside potential, they argue, yet there’s plenty of growth left for everyone:
China’s more than 100 million online-broadcast viewers are evolving from a demographic of largely less-educated men in smaller cities to wealthier men in larger ones.
Two years ago, just before live video launched, Tang offered to take Momo private at $18.90 per ADR. Last August, after failing to get enough backing, his consortium canceled its bid. At the time, Nisha Gopalan and I wrote that he should drop the stock shenanigans and focus on building a business. In the past year his team has done just that, and the stock has since climbed 158 percent, making it the sixth-best performer in the MSCI Asia Pacific Index.
Harvard Management Co., which oversees the university’s $35.7 billion endowment, took note and bought 214,350 shares in the first quarter of this year — making it the fund’s fifth-largest holding. Based on the stock’s quarter-end price of $34.07 (Harvard probably got in much cheaper), the fund has already netted a 21 percent return.
There may be room for further gains. The shares are trading at 27 times 2017 estimated earnings, well below their 31 multiple at the end of the first quarter, as sell-side analysts keep raising full-year estimates.
How high can Momo go? Stay tuned.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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