CEO says the laggard app it purchased in 2018 has potential for strong growth following the recent departure of its founder

Key Points:

  • Momo believes its underperforming Tantan app could grow strongly following a major overhaul now in the works
  • Such a Tantan revival could help put Momo back on a growth track

By Doug Young

Many may know dating app Momo Inc. (Nasdaq: MOMO) for its moniker as the “Tinder of China,” due to its primary function as a place for people to hook up online. But a better comparison lately might be to a family in turmoil, following internal changes that began with last year’s ceding of the CEO title by founder Tang Yan, who remains as chairman.

Now we’re learning that Tang’s move from the CEO’s office was just the beginning of a bigger shakeup. That shakeup claimed new victims in April with the departure of the CEO and COO of the Tantan app that Momo acquired for $760 million in 2018.

The departure of the pair had first been rumored about a month ago. But Momo’s current CEO Wang Li, formerly Momo’s longtime COO who took over after Tang’s departure from the role last October, confirmed the changes at the top of Tantan on the company’s action-packed investor call following the release of its quarterly earnings this week.

This kind of housecleaning was probably needed for a while at Momo, which has been a major underperformer since it once excited investors as an early adopter of location-based services (LBS) for its core Momo app.

Investors seemed to welcome the news, with Momo’s shares up more than 10% since the announcement of the company’s latest quarterly results on Tuesday and a subsequent call where Tantan was a major point of discussion. Interestingly, the shakeup at Tantan wasn’t even mentioned in the earnings announcement, meaning anyone who didn’t listen to the call would have missed it.

“We have always believed that Tantan has the potential to grow bigger than where Momo is today,” said Wang, who is now also Tantan’s acting CEO, on the call. “After we took over in April, we’ve conducted a comprehensive review of Tantan’s marketing approaches.”

If we believe Wang, Momo could indeed be on the cusp of a rebirth following its years-long decline. The company was an investor darling after it listed on the Nasdaq in 2014, with its shares moving higher over the following years to roughly quadruple from their IPO price as recently as 2018.

But it has been in a state of decline since then, both in terms of revenue and profits as well as its stock price. Before this week’s rally, the stock was trading right around the level of its 2014 IPO price – not exactly the best return for anyone who had held the shares for the last seven years.

The stock currently trades at a price-to-earnings (PE) ratio of about 10, which would be low if this was an internet growth company. But clearly investors don’t see Momo as that kind of company after more than a year of declining revenue and profits.

Its closest publicly listed competitor from China is probably gay dating app BlueCity, which is losing money but trades at a price-to-sales (P/S) ratio of 1.6. Momo trades at a similar P/S ratio of 1.5. But whereas BlueCity’s revenue rose 47% last year, Momo’s fell 12%. BlueCity is also much smaller than Momo, with a market cap of $250 million for the former, compared with Momo’s much-larger $3.2 billion.

Change in the Air?

All that said, we’ll take a look at Momo’s latest results, which contain a few bright spots, but on the whole, show a company in decline.

The company’s revenue fell 3.4% to 3.47 billion yuan ($543 million) in the first three months of the year, and Momo said it expects another decline of around 5% in the current quarter. While declines are never good, both of those figures do represent an improvement from the 12% revenue decline from last year, including a 19% drop in the fourth quarter.

The company’s first-quarter profit was similarly uninspired, falling 14% to 462 million yuan.

One of the few bright spots in the report was revenue from virtual gifts, which rose 23.8% to around 1.5 billion yuan, accounting for more than 40% of the company’s total. This revenue source does indeed seem like a no-brainer for a dating app like Momo, since people on such an app would almost certainly be willing spend on suitable presents to attract a prospective date.

In terms of revenue breakdown between Momo and Tantan, the former still accounts for the big majority of more than 80% of the company’s overall figure. But as we’ve already noted, Wang said he believes Tantan, which is known for its livestreaming functions that are now all the rage in China, has the potential to grow to become a bigger breadwinner than the older Momo app.

Investor relations spokeswoman Cathy Peng said on the call that management is targeting between 20% and 35% growth for Tantan’s user base following changes now in the works, though she didn’t provide a timeframe. Many of the actual changes at Tantan were discussed on the call, so readers looking for more details can go directly to the transcript by clicking here.

“While Tantan is undoubtedly the most-dedicated and effective dating app in China, we do have many opportunities to optimize so that we can do better in connecting the users for romantic purpose,” Wang said.

At the end of the day, investors should probably be optimistic, but also perhaps a little skeptical. After all, as the saying goes, “talk is cheap.” That’s certainly a good thing to remember for users of Momo and Tantan. Wang was also quite a good talker in explaining his plans to transform Tantan to better realize its potential.

But we should also note that Wang has been at Momo since its founding in 2011 and was reportedly largely running the company for years in his COO position before taking over the CEO title late last year. That means he probably presided over Momo’s gradual decline over the last few years, even if he’s trying to bill himself now as the visionary who will breathe new life into Tantan.

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