Momo, the end of the Internet?

Most post-80s and post-90s are familiar with Momo, a dating app for meeting strangers.

In 2014, it surpassed 100 million registered users, putting pressure on WeChat at one point.

With the outstanding performance of the Momo app, Momo Technology successfully went public on the U.S. stock market in 2014. Now, nearly 10 years after its listing, the company changed its name to Hello Group (NASDAQ:MOMO) in 2021.

Ultimately, socializing with acquaintances and strangers each went deeper into their respective fields. The differentiation in competition between Momo and WeChat has allowed Momo to thrive peacefully.

To strengthen its advantage in socializing with strangers, Momo acquired another app called TanTan in 2018, continuing to deepen its presence in the field of socializing with strangers.

However, in recent years, it has been on a downward trend, with the stock price plummeting from its peak in 2018.

Is there still a chance for the now neglected Hello Group?

I. When the "licking dog" starts to love itself

Under Hello Group, there are currently two core applications, Momo and TanTan. There are also other applications and businesses, including movie production and distribution, program production, etc., but they are not significant.

The company's net sales in 2023 mainly come from live video services, value-added services, mobile marketing services, mobile games, and other services.

Among them, the net sales of live video services amount to 60.72871 billion yuan, accounting for 50.6% of total net sales; the net sales of value-added services amount to 57.52571 billion yuan, accounting for 47.9% of total net sales; the net sales of mobile marketing services amount to 1.33677 billion yuan, accounting for 1.1% of total net sales; the net sales of mobile games amount to 196.1 million yuan, accounting for 0.2% of total net sales; and the net sales of other services amount to 235.94 million yuan, accounting for 0.2% of total net sales.

In the interim report this year, there has been a slight change in the main business structure, with the proportion of value-added services exceeding 50% for the first time, and the proportion of live services falling below 50% for the first time.

The reason for this change is not how well the value-added services are performing, but that both businesses are declining, with value-added services declining less, while the live services are declining uncontrollably. In 2019, the company's live services brought in 12.4 billion in revenue, while last year it was 6.07 billion, halving from the peak

Looking at the performance report for the first half of this year, total revenue declined by 11.83%, live streaming revenue continued to decline by 15.8%, value-added services declined by 7.7%, and net profit plummeted by 58% (due to a one-time non-cash tax provision). At the same time, monthly active users and paying users are both continuing to decline. Tantan's monthly active users dropped significantly by 4.4 million to 12.9 million, and paying users decreased by 400,000 to 1 million. Momo's paying users decreased by 700,000 to 7.2 million.

Revenue and profits continue to decline, with monthly active users and paying users of the two main products continuing to decrease. Despite such poor performance, the stock price hardly reacted after the release, and even slightly increased. It can be said that the market's expectations for Hello Group are already quite low.

Faced with declining performance, it seems that the management has no effective solution. On one hand, they are mainly reducing some costs and expenses, such as reducing marketing expenses for their products or downsizing by cutting personnel costs and stock option expenses. Last year, cost reduction efforts led to positive growth despite the revenue decline, but this year the room for improvement in this area is not as significant.

On the other hand, they are focusing on expanding internationally, trying to seek new growth opportunities by launching new social applications and expanding into overseas markets. The financial report did not provide much specific data on overseas business, but during the conference call, the management mentioned that "in the second quarter, the total revenue of new applications reached 355 million RMB, a year-on-year increase of 36% and a quarter-on-quarter increase of 4%, mainly driven by overseas business."

The company's overseas strategy mainly involves strengthening local operations, expanding products from voice-based services to live streaming services, and expanding business in affluent GCC regions and other Middle Eastern countries. Overseas business is currently the only part of Hello Group that can be expected to grow.

Momo's international expansion began in 2012 but has ended in failure multiple times. Now with Tang Yan's return, there seems to be a greater emphasis on expanding overseas business. As for domestic operations, the company appears to be focusing on maintaining its current position.

There may be two main reasons for this:

1. Fierce domestic competition and strict regulations

Whether in live streaming or socializing with strangers, there are many regulations to comply with domestically, and they are becoming increasingly strict. These two areas of business are easy to cross the line if not careful.

Crossing the line is an important element of socializing with strangers, as it is associated with "sexual needs," giving it its uniqueness. Too many restrictions may make people feel that there is no difference from ordinary social platforms. Platforms like Douyin and Xiaohongshu allow users to meet strangers, socialize, and even live stream. Therefore, apps like Momo can only improve user experience through mechanisms and mini-games, but overall, it is not easy to break through the ceiling 1. At the same time, the project manager must keep up with the trend of rejuvenating the application, otherwise the younger user base will continue to age, leading to the emergence of new, younger and unfamiliar social networking apps. Previously, there was the acquisition of TanTan, followed by the emergence of Soul. This field is all about capturing the younger audience.

2. Economic downturn coupled with changing perceptions

The economic downturn has a significant impact.

Many people live in a bubble of illusion, especially under the influence of the internet, where it seems like everyone earns millions of RMB per year on social media platforms. Many people mistakenly believe this is the norm in society.

This also leads to high expectations from women, who require a certain level of "strength" to capture their attention and respect.

On the other hand, for men, the cost of being a "licking dog" keeps increasing. From online to offline, from daily life to holidays, falling into the "love" scenario often means falling into the trap set by businesses. Licking dogs have no choice.

A licking dog may only become rational when they truly run out of money.

When the economy is doing well, there is more room for error, and men may try harder. However, during an economic downturn, a licking dog may find themselves struggling to even afford a meal. Even if they manage to scrape some money together, it still may not meet the high expectations of women, who may then look down on them. In such cases, it's better to treat oneself well.

The concept that pursuing a partner requires bearing more of the financial burden in a relationship becomes more flexible during an economic downturn. The change in societal attitudes can be seen from the previous "fat cat" incident that went viral online.

More directly, in recent years, while there has been a collapse in the consumption of cosmetics, diamonds, and other luxury goods, male consumption has been rapidly increasing. Data from Tmall shows that during the 2023 "Double 11" period, road bikes, esports products, and outdoor jackets became the "new three treasures" of male consumption, with online sales increasing by 305%, 114%, and 90% respectively.

Hello Group's business is largely built on men pursuing women. Therefore, in the face of such changes in the overall landscape, it is understandable that the company focuses on maintaining its domestic business and accepting its fate.

2. Internet cigarette butt stocks?

Hello Group's poor performance and bleak outlook have been anticipated by the market, leading to an overall decline in stock prices over the past five to six years, resulting in a market value drop of over 80%.

However, Hello Group is still able to maintain an annual free cash flow of over 1 billion RMB.

From an asset perspective, with 5.959 billion RMB in cash, 350 million RMB in short-term investments, and 1.514 billion RMB in restricted cash, Hello Group's foundation on the balance sheet is still solid, with approximately 7.823 billion RMB in cash-like assets. This is not far off from the current market value of 1.1 billion USD.

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Non-current assets consist of fixed assets, some long-term investments, mainly deposits and restricted assets, totaling 6.755 billion yuan.

Hello Group has a considerable amount of money on its balance sheet, but also a significant amount of liabilities, totaling 6.109 billion yuan. Since last year, long-term loans have increased by 1.938 billion. In the past two years, loans have mainly been converted between bills, short-term loans, and long-term loans. This year, long-term loans have remained unchanged, while short-term loans have increased by around 1.3 billion. It is unclear what the sudden increase in loans is for, but corresponding changes on the asset side mainly involve long-term investments and short-term restricted cash.

Based on Hello Group's current asset-liability situation, cash assets can cover part of the liabilities, but the remaining assets, after deducting deposit projects, are lower than the current market value, not a typical "cigar butt stock."

However, with ample cash and good cash flow, Hello Group has a history of regularly paying dividends. Based on last year's annual dividend and current price, the dividend yield is around 8-9%.

At the same time, Hello Group has a significant stock repurchase plan.

On March 14, 2024, the board of directors of Hello Group approved the revision of the "Stock Repurchase Plan," extending the time frame to June 30, 2026, and expanding the scale of the plan to repurchase up to $286.1 million worth of stock. As of September 3, 2024, Hello Group has repurchased approximately 30.9 million American Depositary Shares (ADS) in the open market, totaling around $174.6 million, with an average purchase price of $5.63 per ADS.

There is still around $111.5 million remaining, which is equivalent to about 10% of the company's market value of only $1.1 billion.

With dividend and repurchase support, although not a typical "cigar butt stock," the cost-effectiveness is still good.

Conclusion

Hello Group is not highly valued, has no net debt, ample cash, and is unlikely to go bankrupt. Operationally, it mainly depends on whether going global can create a new value curve.

The stock price is supported by dividends and repurchases