Rising Costs Will Depress Margins Despite Faint Global Gains

Key Takeaways

• Rising regulatory costs, user base decline, and reliance on a few core apps are pressuring profitability and heightening long-term business risks.
  
• Overseas growth faces high costs and geopolitical barriers, while brand limitations and demographic shifts threaten future revenue potential.
  
• International expansion, AI-driven user engagement, disciplined cost control, product innovation, and successful new launches diversify revenue streams and support margin and earnings growth potential.

Catalysts

Provides mobile-based social and entertainment services in the People’s Republic of China and internationally.

• Intensifying regulatory scrutiny and changes in tax policy, as evidenced by the requirement to apply a higher withholding tax rate on dividends and ongoing industry-wide compliance measures, are likely to structurally increase operational costs and reduce net margins for Hello Group over time.
  
• The ongoing shift in consumer preferences away from legacy social and dating platforms towards newer, more immersive or decentralized experiences threatens Hello Group's relevance, and could further depress the user base and long-term revenue, especially as growth in paying users on core domestic apps like Momo and Tantan wanes.
  
• Concentration risk is rising due to continued dependence on a small number of cash cow domestic apps that are experiencing sequential declines in paying users and ARPU growth only partially offsetting overall user churn, increasing the risk of a sustained top-line decline and limiting earnings growth.
  
• Overseas expansion, while generating high headline growth rates, is encountering rising user acquisition costs, regional market saturation, and geopolitically driven barriers, all of which threaten both the sustainability of revenue growth and the group's ability to improve net margins as international businesses scale.
  
• Persistent brand perception as a casual dating platform hampers Hello Group's ability to transition into higher value, premium services, restricting ARPU improvement, and in a context of an aging Chinese population and shrinking youth demographic, this could result in a structurally declining addressable market and long-term revenue contraction.

Hello Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hello Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hello Group's revenue will decrease by 0.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.2% today to 13.7% in 3 years time.
• The bearish analysts expect earnings to reach CN¥1.4 billion (and earnings per share of CN¥8.15) by about September 2028, up from CN¥854.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.1x on those 2028 earnings, down from 10.1x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 17.0x.
• Analysts expect the number of shares outstanding to decline by 3.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.44%, as per the Simply Wall St company report.

Hello Group Future Earnings Per Share Growth

Risks

• Hello Group's international business saw overseas revenue grow 73% year-over-year and now represents 17% of total group revenue, with management citing robust growth across multiple brands and geographies; sustained overseas expansion could drive meaningful revenue and profit growth, contradicting a persistent share price decline.
  
• AI-driven product enhancements, such as personalized greeting features and AI chat assistants, have increased user engagement, improved retention, and delivered sequential ARPU growth, suggesting that ongoing investment in AI technology may strengthen Hello Group's ability to monetize users and support net margin improvements over time.
  
• Cost management initiatives, including disciplined user acquisition spending, refined focus on high-ARPU users, and organic traffic growth, have driven stable ROI above 100% and improved Tantan's profitability, which may result in greater earnings resilience and support a recovery in operating margins.
  
• Product innovation and differentiated user experiences-such as enhanced user verification, UI simplification, and tailored membership packages-have led to increases in organic user growth, user retention, and ARPU on core apps, creating a pathway for future revenue stabilization or growth despite declines in overall paying users.
  
• Successful launch and early monetization of new products, including AI character chat in Japan and recent acquisitions such as the Happn dating app in Europe, demonstrate Hello Group's ability to diversify its revenue streams and leverage secular growth in global online social and dating markets, potentially lifting group-level revenues and profits in the long term.

Valuation

• The assumed bearish price target for Hello Group is $7.45, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hello Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $13.0, and the most bearish reporting a price target of just $7.45.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥10.3 billion, earnings will come to CN¥1.4 billion, and it would be trading on a PE ratio of 7.1x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $7.57, the bearish analyst price target of $7.45 is 1.6% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.