Spruce Point Capital Releases a Strong Sell Forensic Research Opinion on Momo Inc. (Nasdaq: MOMO)
Heavily retail owned China live streaming company that has multiple, undisclosed, financial and operational red flags that should give investors and regulators significant concern
NEW YORK, June 27, 2018 /PRNewswire/ -- Report entitled "Mo(mo) Money Mo(mo) Problems" outlines how Momo Inc. ("Momo" or "the Company") faces at least 30%-50% downside risk as a result of the maturation of China live streaming and a host of red flag that should give investors and regulators significant pause. Spruce Point's insights into Momo were formed after months of deep forensic analysis and 50 detailed Mandarin interviews around the Momo ecosystem.
- Mandarin-Based Agency Interviews Suggest Fundamental Challenges For Momo's Live Video Segment: Management's comments and financial results during Q2 and Q3 2017 indicated concern about the Live Video segment and prompted a shift in strategy towards working with agencies. Very little has been disclosed about the specifics of the agency strategy and we believe the magnitude of the shift may be overstated and that the accounting of some agency related transactions remains unclear. Based on 18 detailed mandarin-based talent agency interviews we believe that the competitive intensity of live streaming in China is picking up materially. Spruce Point believes this will result in Momo's live streaming market share falling over time and its revenue sharing with agencies increasing materially to come in line with competitors. Given that Live Video presently accounts for 85% of Momo's revenue, we expect the Company's revenues and earnings to fall well short of Wall Street expectations in the coming years.
- Momo Selectively Reveals/Conceals Material Disclosures From Investors: Through a combination of investigative research and detailed forensic analysis of Momo's VIEs we believe we have discovered the following undisclosed red flags:
some text- In November 2017 Momo's primary operating VIE, Beijing Momo, was charged by the SAIC with "Filing corporate information with the intent to conceal the truth and falsify." This announcement coincided with the resignation of three Momo Directors for "personal reasons."
- Momo has 9 undisclosed first level subsidiaries and 114 undisclosed second level subsidiaries. Undisclosed entities provide the opportunity for the legal management of the Company to extract benefits for themselves or hide the true nature of the operations.
- Momo owns at least two undisclosed talent agencies and is engaging in related party transactions. Spruce Point's investigators also visited a "Top 5 Agency" and found a residential building with a sign that read "home delivery, just walk in" calling into question the true scale of the operation.
- Another undisclosed MOMO VIE invested in, and possibly operated, an illegal onshore gambling site (Pokermaster 德扑圈) that was shut down earlier this year
- The insertion of several limited partnerships into the Tantan VIE structure shortly before the Momo acquisition, close to the Momo Directors resignation date, masks who was paid in the transaction. We have also identified irregularities regarding payments made to Momo pre-IPO investors that may suggest a history of insider enrichment.
- Spruce point has identified several instances where Momo's statements, performance metrics and financial performance conflict with 3rd party data providers or responses from individuals that Spruce Point interviewed in the live video ecosystem.
- Limited Upside to Sell Side Target and Significant Insider Selling: 19 analysts covering Momo have a consensus "Buy", but with a P/E multiple in the middle of Momo's historical range, they are blind to the risks of our report. Momo insiders have sold $2 billion of stock since the IPO and Momo Executives and Directors, except for the CEO, are on pace in 2018 to sell more than 2x what the sold in 2017 ($300 million). After adjusting for fundamental challenges in the live video segment and applying a multiple in the bottom end of Momo's range to reflect the above highlighted risks we arrive at a target price of $23-$32 and see 30%-50% downside.
The research report can be found on our website at www.sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
Spruce Point Capital has a short position in Momo (MOMO) and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.
