- Shares in Hello Group sank to a five-year low after release of its third-quarter earnings that showed paying users fell, hurting revenues.
- Operator of popular dating apps Momo and Tantan has struggled to find its footing despite a rebranding strategy, as it faces stiff competition and regulation worries.
- Company’s strategic shift to customer retention from monetization knocks quarterly revenues lower as competition intensifies.
By Mia Shanley
Hello Group (MOMO.US) was all the rage a decade ago when it launched its hugely popular Momo dating app, sometimes called the “Tinder of China.” But with many of its early users now well into adulthood, the company is searching for new catalysts to jumpstart its stagnating business, which was on stark display in its latest quarter results released this week.
The reaction on Wall Street wasn’t pretty, with the company’s shares sinking to lows not seen in more than five years in the days after the report came out.
In an effort to embrace its age and show it has moved on from its image as a hook-up site, the company rebranded itself from Momo, the name of its popular app meaning “stranger, stranger,” to Hello Group in August. But the move failed to excite investors, and its shares have moved steadily lower as the company struggles to overhaul its image.
There’s no question about Momo’s dominant position in China. It’s by far the country’s most popular mobile dating app, according to data from Statista. The company further consolidated its position as lead matchmaker in 2018 when it bought another popular dating app Tantan.
But Hello’s impressive growth story has lost traction lately. Its latest financial report released on Tuesday showed third-quarter revenues came in at 3.76 billion yuan ($590 million), down 0.2% from the previous year. Its profit fell 11.7% to 403 million yuan over the same period.
Such lackluster results contrast sharply with headier times when the company’s revenue was doubling as recently as 2017. Revenue growth then slowed to a more moderate double-digit pace before falling during the Covid pandemic. The company’s share price has more than halved since February this year as the new reality sets in.
There are quite a few rivals now vying for young Chinese hearts, including foodie-focused QingChiFan, gay dating app BlueCity (BLCT.US) and bigger tech giants like Tencent (0700.HK), which recently rolled out Maohu, Qingliao and Pengyou. Tencent’s popular WeChat already includes functions that let people connect with others nearby. And then there’s the more friend-oriented Soul, which made headlines in June with its last-minute scrapping of a New York IPO.
Reflecting the sea of competition, Momo reported 115.5 million monthly active users in the third quarter, up just 2% from the previous year and flat from the previous quarter.
On the company’s earnings call, management blamed the weak revenues on a “strategic shift” away from monetization toward improving user experience and retention. In that regard, the company reported its paying users dropped 7% to 12.2 million in the third quarter from 13.1 million a year ago.
The net effect of all the glumness was a selloff that saw Hello’s shares tumble 13% the day it reported the results. The stock sagged further over the next days to slip below the psychologically important $10 threshold on Thursday for the first time since early 2016.
As the company works harder to fend off competition, it unsurprisingly continues to insist the future still holds out great potential.
“Young people today are much more willing to pay for dating services in comparison with their prior generations and their purchasing power is also rapidly rising,” Chief Executive Wang Li said on the earnings call.
Momo’s main revenue source comes from its live streaming product that lets viewers buy gifts for their favorite broadcasters, an area which took a hit during the Covid pandemic but was one bright spot in the quarter as such value-added service revenues rose 15%.
Investors are on edge over Chinese stocks in general after Beijing launched a surprise crackdown on tech firms earlier this year over data security concerns. Data-driven companies like Hello Group remain subject to the whims of Chinese authorities who could clamp down on business at any time due to such concerns.
Hello’s data could be considered particularly sensitive due to the personal nature of activities on its apps, which most people would probably prefer to keep private. Similar concerns led the U.S. to pressure the Chinese owner of popular American gay dating app Grindr to sell the service last year.
On the earnings call, analysts tried to get management to shed some light about the way forward beyond Momo and even the newer Tantan, which is currently being overhauled following a tumultuous period after its acquisition by Momo three years ago. But their answers were somewhat vague.
“Our goal in the coming three to five years is to have 10 or so apps that not only can be profitable but also can be dominant in specific niche markets in the social space,” Wang said, adding the company has “several” other apps it plans to roll out next year.
Wang added that overseas markets would become an increasingly important part of the company’s growth strategy, saying it had seen “good progress” in India and Indonesia. Yet that is hard to quantify as the company makes no mention of such overseas markets in its earnings report. And Chinese apps have received a chilly reception in India lately over concerns similar to those expressed by the U.S. over Grindr.
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 likely presided over Momo’s gradual decline over the last few years.
For investors, a potential silver lining in Hello Group’s struggles is that it now trades at a price-to-earnings (P/E) ratio of just 6.9, which is cheap no matter how you slice it. Chinese social media giant Weibo Corp (WB.US) trades at 24 times and Match Group (MTCH.US), owner of the original Tinder, trades at a whopping 68 times.
Apart from working to rejuvenate its business, the company has also been buying back shares to support its stock. It said in its earnings report it had bought back American depositary shares (ADSs) worth $182.4 million on the open market in the past year at an average price of $12.87, signaling it believed its shares were already undervalued at that level. The company listed in 2014 at $13.50 a share.
There is also no denying Hello Group’s sheer size makes it a formidable player in the vast China market. Its 115 million monthly active users for Momo compares with 75 million for Tinder, according to Business of Apps. Yet Tinder-owner Match Group, which has a large portfolio of other dating services including match.com and OkCupid, has an eye-watering market cap of $36 billion versus Hello Group’s meager $2 billion.
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