The following stock article is for educational purposes only. The author is long shares of MOMO, and so are the subscribers of his TREND TRADE LETTER (sold on DrStoxx.com).
About Momo, Inc.:
Momo, Inc., operates as a mobile-based social networking platform in China. The platform includes a mobile app for networking, a video chat app, mobile video games, paid emoticons, mobile marketing, and other services. The company was founded in 2011 and is headquartered in Beijing. An English based platform for the U.S. is in the works.
Why We Are Recommending MOMO:
Momo, Inc. IPO’d in late 2014 but the stock could not gain much traction for about 18 months, trading just above and below it inaugural price of $14. All that changed in late August last year when the stock broke out of the range and hit new IPO highs on strong volume. The cause? Huge EPS surprise beats, followed by a double uptrade from Morgan Stanley (from Underweight to Overweight). The company has continued in the same fashion with a string up upside EPS surprises, each over 20% in magnitude, including a whopping 39% upside surprise in the most recent quarter. In fact, EPS growth has accelerated in recent weeks. Current year on year EPS estimates have been rising all year, but they took a big leap in May and June, rising from $1.22 to $1.40 per share. This earned MOMO a coveted Zacks Rank of 1 (strong buy), putting the stock in the top 5% of all companies on the basis of earnings estimate revisions.
A new Barron’s article highlights the growth in Monthly Active Users (MAU) of the Momo platform as registered by analysts who follow social media trends in China. The article calls out Jeffries analyst Karen Chan for raising her price target on MOMO in response to this trend. She lifted her target to $52 per share, a full 40% above recent share price. She also sees the MAU continuing to trend higher for Momo, which will underpin the company’s monetization potential.
At the same time, the stock price has fallen over this period. Shares topped out at a new IPO high in late May, just over $45 per share, and have pulled back to their current price around $37. This disconnect between rising earnings estimates and falling stock price (which has come to rest at a key support level), is our signal to buy the stock.
Technical Price Chart for Momo, Inc.:
In the chart below, the uptrend from the December low is evident along with the multi-week pullback off the EPS new-IPO high. We see a potential Inverted Head & Shoulders bottom on the pullback which could mark the beginning of a new leg higher from here.