The stock of Momo (NAS:MOMO, 30-year Financials) appears to be significantly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $13.81 per share and the market cap of $2.8 billion, Momo stock is believed to be significantly undervalued. GF Value for Momo is shown in the chart below.
Because Momo is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth, which averaged 16.1% over the past three years and is estimated to grow 5.96% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. Momo has a cash-to-debt ratio of 2.31, which ranks worse than 68% of the companies in Interactive Media industry. Based on this, GuruFocus ranks Momo’s financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Momo over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Momo has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $2.2 billion and earnings of $1.39 a share. Its operating margin of 16.15% better than 69% of the companies in Interactive Media industry. Overall, GuruFocus ranks Momo’s profitability as fair. This is the revenue and net income of Momo over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Momo is 16.1%, which ranks in the middle range of the companies in Interactive Media industry. The 3-year average EBITDA growth is 5.5%, which ranks in the middle range of the companies in Interactive Media industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Momo’s ROIC is 17.13 while its WACC came in at 9.14. The historical ROIC vs WACC comparison of Momo is shown below:
To conclude, Momo (NAS:MOMO, 30-year Financials) stock shows every sign of being significantly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Interactive Media industry. To learn more about Momo stock, you can check out its 30-year Financials here.
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