Momo And Tantan's New Features And MENA Expansion Will Transform Revenue Growth And Boost Earnings

Key Takeaways

• Focus on monetizing users and adding features to Momo and Tantan to stabilize revenue and grow user base.
  
• Overseas expansion and localization strategies aimed at top-line growth, while shareholder value efforts attract investors.
  
• Declining revenues from key apps, competition, and international reliance may negatively impact Hello Group's future growth, profitability, and earnings stability.

Catalysts

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

• Hello Group is focusing on increasing the monetization of mid-to-long tail paying users in the Momo app by introducing new interactive features, aiming for a more stable revenue stream which could improve profit margins.
  
• Tantan is working on improving the core dating experience by enhancing user identity authenticity and chat interaction rates, which may stabilize and grow its user base, potentially increasing revenue in the long-term.
  
• The company is prioritizing overseas business expansion, especially in markets like the MENA region with the Soulchill app, expecting to drive both top-line and bottom-line growth as these markets ramp up in 2025.
  
• Hello Group is optimizing cross-border management and localizing operations to address unique cultural preferences, which can strengthen market presence and improve operational efficiency, likely boosting earnings.
  
• Despite revenue declines, Hello Group is committing to shareholder value through continuous buybacks and potential dividend payments, which could enhance earnings per share and attract investment.

Hello Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hello Group's revenue will decrease by -2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.9% today to 14.7% in 3 years time.
• Analysts expect earnings to reach CN¥1.5 billion (and earnings per share of CN¥8.52) by about January 2028, up from CN¥1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥1.7 billion in earnings, and the most bearish expecting CN¥1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, up from 7.1x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 24.7x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.06%, as per the Simply Wall St company report.

Hello Group Future Earnings Per Share Growth

Risks

• Declining revenues from key apps such as Momo and Tantan, primarily due to product adjustments and spending softness in a weak macroeconomic environment, could negatively impact future revenue growth and profitability.
  
• The ongoing reduction in live-streaming revenue and increased competition in value-added services could further pressure margins and revenue streams.
  
• Tantan faces challenges with declining user base and difficulties in stabilizing paying users, which may continue to depress revenue and profitability if not successfully addressed.
  
• The company is experiencing a decrease in adjusted operating income and margins year-over-year, indicating rising operational inefficiencies or weaker income generation, which could hurt overall earnings.
  
• The company’s heavy reliance on international expansion and the associated risks, such as execution challenges and market acceptance, adds uncertainty to future revenue and profit trajectories.

Valuation

• The analysts have a consensus price target of $7.96 for Hello Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.88, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥10.0 billion, earnings will come to CN¥1.5 billion, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 9.1%.
• Given the current share price of $7.43, the analyst's price target of $7.96 is 6.7% higher. The relatively low difference between the current share price and the analyst consensus 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.