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As a new addition to our most recent Value Leaders Rankings, Hello Group (MOMO) seemingly came out of nowhere to command the #2 position on our leaderboard. The stock sank to one-year lows late last month after a disappointing Q1 report spooked investors. However, the selling pressure was short-lived. Since hitting a bottom last month, the stock has climbed by over +25%.

However, despite the recent appreciation, MOMO still trades at decent multiples, boasting an attractive 6.1x forward earnings valuation, a 1.3x EV to EBITDA multiple, and a respectable 21% free cash flow yield. While MOMO is trading at half where it was just one year ago, reflecting a persistently stubborn macroeconomic landscape, there were silver linings in the company's Q1 report, potentially setting it up for outsized appreciation going forward.

• What is MOMO? A China-domiciled organization, MOMO operates three distinct but similar businesses: Momo, its core social media app; Tantan, a dating app; and several standalone apps launched globally. The Momo app, which makes up nearly all of the company's profits and around 75% of its revenue, offers users numerous social media-related options, from live streaming to location-based social interactions.
• Why did Q1 trigger a sharp pullback? Revenue continued to contract as a weak macroeconomic backdrop weighed on consumer sentiment. Meanwhile, MOMO proactively reduced revenue-oriented competition events in live streaming and other value-added services experiences to limit what it referred to as unhealthy monetization approaches. Additionally, seasonality from the Chinese New Year only exacerbated revenue-related headwinds.
• MOMO anticipates that its actions will foster long-term growth. MOMO has been making steady progress in implementing its strategic priorities across its businesses, which center around improving efficiency. These efforts resulted in MOMO's Q1 costs falling faster than revenue, culminating in yr/yr margin expansion.
• Encouraging developments elsewhere unfolded in Q1. For instance, MOMO has been enriching its core app, applying AI technology across the user experience and introducing new interactive features, which have already started to drive organic revenue growth, partly offsetting the overall drop in Q1. Also, regarding Tantan, its user base started to recover gradually during March after external headwinds began to ease. MOMO is also stepping up its marketing and innovation campaigns to strengthen the Tantan app.
  • Also worth mentioning is MOMO's overseas efforts. The company continues to enter new markets, which, albeit could pressure short-term profitability, should ultimately lay the foundation for future top and bottom-line growth.

MOMO's performance this year has been disappointing. An alarming Q4 report in March snapped MOMO's upward momentum, setting an extended period of selling pressure in motion. However, management identified areas of weakness at that time, quickly looking to optimize its cost structure and maintain user and revenue growth. While macroeconomic pressures have thrown a wrench in MOMO's short-term goals, MOMO is taking the proper steps to enhance profitability and construct a more substantial foundation for longer-term growth. As always, a 15-20% stop loss is recommended.