Is Momo Inc (NASDAQ:MOMO) Undervalued After Accounting For Its Future Growth?

Looking at Momo Inc’s (NASDAQ:MOMO) fundamentals some investors are wondering if its last closing price of $33.97 represents a good value for money for this high growth stock. Below I will be talking through a basic metric which will help answer this question. See our latest analysis for Momo

How is MOMO going to perform in the future?

If you are bullish about Momo's growth potential then you are certainly not alone. Expectations from 19 analysts are extremely positive with earnings per share estimated to rise from today's level of $1.538 to $2.693 over the next three years. This results in an annual growth rate of 20.25%, on average, which signals a market-beating outlook in the upcoming years.

Can MOMO's share price be justified by its earnings growth?

As the legendary value investor Ben Graham once said, “Price is what you pay, value is what you get.” Momo is trading at price-to-earnings (PE) ratio of 22.09x, which tells us the stock is undervalued based on its latest annual earnings update compared to the internet average of 26.56x , and overvalued compared to the US market average ratio of 18.69x .

We already know that MOMO appears to be undervalued based on its PE ratio, compared to the industry average. But, to be able to properly assess the value of a high-growth stock such as Momo, we must incorporate its earnings growth in our valuation. The PEG ratio is a great calculation to take account of growth in the stock's valuation. A PE ratio of 22.09x and expected year-on-year earnings growth of 20.25% give Momo an acceptable PEG ratio of 1.09x. This means that, when we account for Momo's growth, the stock can be viewed as slightly overvalued , based on its fundamentals.

What this means for you:

MOMO's current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you're a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

1. Financial Health: Is MOMO’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Valuation: What is MOMO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether MOMO is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.