Momo Inc. (NASDAQ: MOMO), the Chinese location-based social media platform, released second-quarter results last week. The results were better than expected and led to the stock price tentatively breaking out of a strong downtrend dating back to June last year.

The stock price may have also received a boost from Zao, the face swapping app which went viral over the weekend. Momo owns the company that launched Zao, which is now mired in controversy. If this was the reason for the pop in the stock price, it may be short lived as the app is already facing restrictions due to privacy concerns.

 

Virtual Gifting Drives Revenue Growth

For the second quarter revenue grew 32% to $604 million, $25 million ahead of consensus. Non-GAAP EPS were $0.82, slightly ahead of estimates, but 39% lower than a year ago. The company’s guidance for the third quarter was in line with estimates, and up 17 to 19% for the year.

Like many social media platforms in China, revenue from live streaming video is seeing a dramatic slowdown in growth. This segment grew revenue 18%, vs 32% for the entire company. Value added revenue, which includes virtual gifting, was the main growth driver and increased 169%.

Monthly active users averaged 113.5 million in the second quarter, up from 108 million a year earlier. Approximately 10% of users are paying for at least one service. The total number of paying users was flat for the year but lower as a percentage of MAUs. Revenue per user is however growing and is now about $18 per paying subscriber per month.

 

The Easy Gains Have Already Been Made for Momo

Momo faced several challenges, including the temporary suspension in May of the homepage and its Tantan dating app, by China’s authorities over privacy concerns. The suspension lasted about a month during May and June and would have had a small effect on revenues. Moreover, competition between social media platforms is increasing, while overall user growth slows.

Year-on-year revenue growth has slowed substantially over the last few years, from a peak of 383% in early 2017, to just 35% in the last quarter. However, the slowdown does appear to have stabilized over the last two quarters.

Annual earnings growth has also nosedived over the same period, moving into negative territory since the beginning of the year. While margins too have fallen, they have done so at a slower rate.

 

Volatility Likely to Continue

Momo’s future growth prospects are uncertain. The forward multiple looks attractive at 11, but that assumes earnings growth of 20% for the next 12 months. That sort of growth may be overly optimistic given the challenges Momo is facing.

However, the stock still has a strong following, both in the equity and options market. Going forward, this share is likely to be driven by sentiment more than anything else. As such it may best be treated as a trading stock.