- Spruce Point and its China-based investigator has spent months doing primary forensic research into Momo, Inc. (Nasdaq: MOMO or “the Company”) and sees $23 to $32/sh, 30% to 50% downside risk. Momo’s investor base is compromised of two distinct cohorts, fundamental investors taking management’s word at face value and momentum/swing traders trying to play the stock’s trend. Both of these groups are oblivious to the serious risks underpinning a Momo investment.
- Momo’s current investor base is primarily comprised of U.S. retail investors and a select number of institutions, almost exclusively in small position sizes, looking to play the recently white hot China live streaming space through one of a handful of US listed companies
- If Momo were simply a North American based company selling a new technology (e.g., VR, AI), investors could conduct significant English based market research, evaluate the product, understand the regulatory environment and make an educated assessment as to whether this is a fad or the next big thing. However, given the newness of the product space and the evolving nature of the competitive landscape it would still remain a speculative investment
- Additionally, if Momo were a North American based company, investors could take confidence in the fact its activities are likely to be transparently disclosed, fairly presented, legal and that management is acting in the best interest of shareholders.
- Unfortunately, Momo isn’t a North American based company and this compounds the risk of an investment substantially. Momo is a China based media company, offering a Mandarin based product to Chinese consumers and conducting business under the oversight of the MOC and SARFT. In order to credibly understand trends in this foreign market, an investor must conduct the same level of company, industry and regulatory diligence in Mandarin that one would conduct in English. Anything short of this is simply a gamble
- When making a Chinese based VIE investment, the emphasis placed on performing forensic research into governance, ownership, the legality of operations and related party transactions takes on much greater importance than a comparable North American investment given different corporate governance practices in China. Spruce Point doesn’t believe that an appreciation for the risks of a Chinese VIE based investment can be achieved without thorough diligence of the VIE structure and its subsidiaries.
[timeless]
Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?
Executive Summary
Correcting The Momo Misperception Through China-Based Investigative Research
Spruce Point and its China-based investigator has spent months doing primary forensic research into
Momo, Inc. (Nasdaq: MOMO or “the Company”) and sees $23 to $32/sh, 30% to 50% downside risk. Momo’s investor base is compromised of two distinct cohorts, fundamental investors taking management’s word at face value and momentum/swing traders trying to play the stock’s trend. Both of these groups are oblivious to the serious risks underpinning a Momo investment.
Momo Company View
Leading mobile based open social networking and entertainment platform in China. Momo’s platform focuses on allowing users to discover (anonymous) connections and build interactions through video, audio, chat and games. Momo’s monetization model is focused on facilitating virtual gifting, user subscriptions and marketing. The Company’s historical financial performance has been driven by “blowout” results in Live Video (think webcam / Instagram live plus online/offline American Idol) and is expected to continue as a result of the professionalization of Live Video, broad user growth and additional engagement/monetization strategies. Momo recently acquired Tantan, a yet to be proven Chinese version of Tinder, for $735m
Momo Trader View
A “momo play” is trading vernacular used to represent a momentum trading opportunity. In a momo trade, the investor is not interested in the company’s fundamentals, but rather, the stock’s very short-term price movements. Alongside of swing traders, who hold positions for days or weeks, these investors are focused on stock technicals and news flows, and have little regard for fundamentals and risks given their holding period. Momo’s stock is a poster child for these types of investors with 12.5k StockTwits followers
Momo Spruce Point China-Based Forensic Research View
Momo selectively reveals / conceals material disclosures from investors and is diverting attention from new challenges in Live Video. For example, Momo did not disclose SAIC charges of “Filing corporate information with the intent to conceal the truth and falsify” in Nov 2017. This may explain why three Momo directors resigned the same month for “personal reasons”. We have uncovered that Momo fails to disclose a web of 9 first level subsidiaries and 114 undisclosed second level subsidiaries. Momo also hasn’t disclosed an illegal gambling site in China. Lastly, our investigation finds that Momo owns at least two undisclosed talent agencies, evidence of related party dealing and disclosed related-party dealings don’t reconcile with local China filings. When visiting the registered business address of Beijing Mushang Culture Media, one of Momo’s top five agencies, we found a residential building with a door that said “home delivery, just walk in” – raising the potential for fabricated operations.
Framing The Diligence Challenges And Risks of A Momo Investment
The diligence and risk potential of a China based investment operating under a VIE structure is materially different from a comparable North American investment, and Chinese investments outside of a VIE structure.
As a result, a diligence process focused on conducting forensic financial analysis is a necessity.
- Momo’s current investor base is primarily comprised of U.S. retail investors and a select number of institutions, almost exclusively in small position sizes, looking to play the recently white hot China live streaming space through one of a handful of US listed companies
- If Momo were simply a North American based company selling a new technology (e.g., VR, AI), investors could conduct significant English based market research, evaluate the product, understand the regulatory environment and make an educated assessment as to whether this is a fad or the next big However, given the newness of the product space and the evolving nature of the competitive landscape it would still remain a speculative investment
- Additionally, if Momo were a North American based company, investors could take confidence in the fact its activities are likely to be transparently disclosed, fairly presented, legal and that management is acting in the best interest of shareholders
- Unfortunately, Momo isn’t a North American based company and this compounds the risk of an investment substantially. Momo is a China based media company, offering a Mandarin based product to Chinese consumers and conducting business under the oversight of the MOC and In order to credibly understand trends in this foreign market, an investor must conduct the same level of company, industry and regulatory diligence in Mandarin that one would conduct in English. Anything short of this is simply a gamble
- When making a Chinese based VIE investment, the emphasis placed on performing forensic research into governance, ownership, the legality of operations and related party transactions takes on much greater importance than a comparable North American investment given different corporate governance practices in China. Spruce Point doesn’t believe that an appreciation for the risks of a Chinese VIE based investment can be achieved without thorough diligence of the VIE structure and its subsidiaries
Retail Investors At A Large Disadvantage In Owning Momo Stock As A Foreign Company
Spruce Point believes Momo is a heavily retail-owned company, and its shareholders are at a disadvantage thanks to exemptions Momo uses as a foreign private issuer.
Article by Spruce Point Capital Management
See the full PDF below.
