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Elevator pitch
I evaluate Hello Group Co., Ltd. (Nasdaq:peach) shares as hold.
In my previous article, The report, published on October 13, 2023, focused on Hello Group’s shareholder capital return and certain user metrics. In this update, we review MOMO’s latest quarterly report. Performance and earnings outlook.
The market is focusing on the company’s weak sales outlook rather than Hello Group’s better-than-expected results. resultMOMO’s financial outlook is negative, as evidenced by the large drop in its share price following the earnings announcement. However, the negative financial outlook has been significantly priced into the company’s valuation, and a Hold rating for Hello Group is appropriate.
Hello Group’s first quarter results beat expectations
MOMO announced its first quarter results for this year. Earnings Release It was issued before trading hours on May 28th.
The company’s actual revenue for the first quarter of 2024 is RMB 2,560.4 million, This was 3.2% higher than the seller’s expected sales of RMB 2.4815 billion. S&P Capital IQ According to the data, MOMO’s sales in the most recent quarter fell 14.7% from the previous quarter and 9.2% from the same period last year.
Hello Group’s revenue decline in the most recent quarter was due to both internal adjustments to its business strategy and external headwinds: In its first-quarter earnings release, the company explained that sales were hit by “an adjustment to de-emphasize large-scale competitive events on the Momo app” and “weakening consumer sentiment.”
Meanwhile, MOMO’s strategic shift away from “large-scale competitive events” is beginning to pay off, with first-quarter sales beating expectations. Q1 2024 Analyst BriefingHello Group explained that it achieved faster-than-expected “non-event-related” or “organic revenue growth” as a result of “strengthening support for high-quality content and adding new game features.”
Hello Group recorded a net profit of RMB 59.9 billion in the first quarter of 2024. However, MOMO’s adjusted net profit was supposed to be RMB 508.5 million excluding a one-time “withholding income tax of RMB 448.6 million,” as shown in the company’s first-quarter earnings report.
In other words, MOMO’s adjusted net profit increased +7.7% year-on-year in the most recent quarter, beating analysts’ consensus bottom line estimate of RMB 403.9 million by +25.9% (Source: S&P Capital IQDuring its first-quarter earnings call, Hello Group noted that “effective cost optimization and efficiency improvement efforts” contributed to a 12.4% decrease in total expenses. The reduced expenses enabled the company to report better-than-expected profits for the first quarter of 2024.
However, as we’ll detail in the next section, Hello Group’s strong performance in the first quarter of 2024 was overshadowed by the company’s disappointing guidance.
But guidance suggests a big drop in second-quarter revenue
Hello Group revealed its sales outlook for the second quarter of 2024 in its first quarter 2024 earnings announcement.
Specifically, MOMO expects its sales to decline 13.9% year-on-year to RMB2.7 billion (the midpoint of its guidance) in the second quarter of this year from RMB3.1377 billion in Q2 2023. This is much worse than Hello Group’s year-on-year sales declines of -5.9%, -6.5% and -9.2% in Q3 2023, Q4 2023 and Q1 2024, respectively.
“Our future revenue trajectory continues to depend on developments in two key areas: macro and regulatory environment,” Hello Group said in its first-quarter 2024 analyst call.
Mainland China’s retail sales growth in April fell short of consensus expectations. -1.5 percentage points. Separately, on May 29, 2024, NBC News article “Online influencers known for their lavish lifestyles are disappearing from China’s social media as the government cracks down on displays of wealth,” it stressed. Given the latest economic data and news flow, it seems premature to conclude that “macro” and “regulatory environment” factors have turned positive for MOMO, which operates Chinese social media apps such as Momo and Tantan.
To make matters worse, MOMO hasn’t provided any quantitative guidance on profit margins or revenue, but its bottom line outlook for the second quarter of this year appears poor.
During the company’s first-quarter earnings call, Hello Group noted the “negative impact from declining revenue.” MOMO also said during its most recent quarterly earnings call that the company plans to set aside funds for growth in the “Gulf region” and for “marketing expenses” for its “Tantan” app.
Therefore, Hello Group’s second quarter earnings are likely to be hit by the negative impact of fixed cost leverage and higher investment.
Negative factors have had a major impact on MOMO’s stock price and valuation.
The negative factors regarding MOMO’s outlook should already be largely reflected in the weak share price following the earnings announcement and its low valuation.
Hello Group’s stock price plummeted. -12.3% The company announced its first quarter results on the morning of trading day, May 28, 2024. This was the first quarter that the company’s stock price More than one third Over the past year.
MOMO’s evaluation comparison with its competitors
| stock | Consensus normalized P/E valuation multiple for the next 12 months | Consensus enterprise value to sales valuation multiple for the next 12 months |
| Hello Group | 3.6 | 0.36 |
| Weibo Corporation (world) | 4.7 | 0.91 |
| Joy Co., Ltd.Yeah) | 8.5 | NA (stock enterprise value is negative) |
| Match Group Co., Ltd.MTCH) | 9.1 | 2.99 |
sauce: S&P Capital IQ.
Based on the peer comparison table above, the market is valuing MOMO at a significant discount to its peers. In absolute terms, Hello Group’s low single-digit P/E ratio and enterprise value to sales ratio of less than 0.4x also look attractive.
Final thoughts
Hello Group Inc.’s stock price is undervalued relative to its peers. However, the company’s financial outlook is unfavorable when considering the company’s earnings outlook and management’s comments. Therefore, considering both the company’s outlook and the stock’s valuation metrics, it is reasonable to give Hello Group a Hold rating.
