Hello Group Inc. (MOMO): A Bull Case Theory

We came across a bullish thesis on VIC about Hello Group Inc. (MOMO) recently. The stock was trading at $5.30 when the thesis was written. The stock returned more than 25% since then. First, we will share a summary of the thesis and then share what hedge funds think about the stock:

Hello Group Inc. provides mobile-based social and entertainment services in the People’s Republic of China. It operates in three segments: Momo, Tantan, and QOOL.

A close up of a user’s hand scrolling through a mobile social media application.

MOMO is an undervalued net-net stock trading at 70% of its net cash and 5x EPS/FCF. Typically, companies trade below net cash because they either consistently burn cash or have poor management, but MOMO does not fit these criteria. Despite being in a probable secular decline, the core business generates significant free cash flow (FCF). Management has demonstrated good operational efficiency, cost discipline, and proactive measures to mitigate regulatory risks. Over the past five years, MOMO has returned over $900 million to shareholders and is expected to return an additional $200 million annually, against a current market cap of around $1 billion.

MOMO’s situation is straightforward, making it a potential opportunity for a 50% return, similar to previous successful investments like HUYA. The company holds substantial cash, including restricted cash used for structured financial products to enhance yields and gain offshore liquidity for dividends and buybacks. This situation offers a classic “cigar butt” investment opportunity with potential for significant short-term gains.

There might be some technical selling pressure which should abate soon. BABA is the 3^rd largest shareholder with just under 5% ownership. With its own set of issues, BABA has been liquidating many of its non-core assets this year (partially to fund its dividend and buyback), and I suspect this has contributed to MOMO’s recent weakness.

MOMO is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 17 hedge fund portfolios held MOMO at the end of the first quarter which was 17 in the previous quarter. While we acknowledge the potential of MOMO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as MOMO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.