- By GF Value
The stock of Momo (NAS:MOMO, 30-year Financials) is believed to be significantly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $14.45 per share and the market cap of $3 billion, Momo stock is estimated to be significantly undervalued. GF Value for Momo is shown in the chart below.
Because Momo is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth, which averaged 16.1% over the past three years and is estimated to grow 7.40% annually over the next three to five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Momo has a cash-to-debt ratio of 2.22, which which ranks in the middle range of the companies in Interactive Media industry. The overall financial strength of Momo is 7 out of 10, which indicates that the financial strength of Momo is fair. This is the debt and cash of Momo over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Momo has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $2.2 billion and earnings of $1.411 a share. Its operating margin is 16.80%, which ranks better than 75% of the companies in Interactive Media industry. Overall, the profitability of Momo is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Momo over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Momo's 3-year average revenue growth rate is better than 91% of the companies in Interactive Media industry. Momo's 3-year average EBITDA growth rate is 5.5%, which ranks better than 84% of the companies in Interactive Media industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Momo's return on invested capital is 19.31, and its cost of capital is 9.31. The historical ROIC vs WACC comparison of Momo is shown below:
In closing, the stock of Momo (NAS:MOMO, 30-year Financials) is estimated to be significantly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 84% of the companies in Interactive Media industry. To learn more about Momo stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.