Hello Group's Tantan Headed For The Exit-Exit?

Key Takeaways:

• Hello Group’s revenue fell 3.2% in the fourth quarter, with an even larger decline forecast in the current quarter, dragged down by plunging business for its Tantan unit
• Company said it finished installing a new management team at Tantan by the end of last year, following the ousting of the unit’s CEO and COO a year ago

By Doug Young

Dating app operator Hello Group’s MOMO latest assessment that 2021 was a “busy” period seems like quite the understatement. Its latest quarterly results released last Thursday showed that many of its recent trends accelerated in the final three months of 2021, including shrinking revenue and paying users. The company, previously known as Momo and often called the “Tinder of China,” said the tough times will continue into the start of this year, especially for its struggling Tantan app.

“2021 was a busy year for us,” CEO Wang Li said in a brief statement accompanying the results. “Despite a variety of external challenges, our team was able to methodically execute our strategic priorities and delivered solid results.”

The coming year looks like it will be filled with more “busy-ness,” as Hello Group seeks to “improve its user experience,” which will not only improve its reputation as more than just a hook-up app, but also hopefully reverse the decline in paying users. From our perspective, one of the most interesting questions is whether 2022 could be the year that Hello says “goodbye” to its struggling Tantan app.

Hello Group was riding high as China’s leading dating app when it acquired Tantan for $760 million in 2018. At that time, Tantan was also a rising up-and-comer on the scene, and Hello held out big hopes that the new app would eventually become an equal or even greater contributor alongside its original Momo app. But that roadmap didn’t go quite according to plan, and things finally came to a head about a year ago with the ousting of Tantan’s CEO and COO.

It’s been a bit of a downhill ride from there. Tantan’s revenue plunged by more than 40% to 437 million yuan ($69 million) in the fourth quarter from 741 million yuan a year earlier, “due to our strategy to lower the monetization level in order to improve user experience and retention,” Hello Group said in its report. The plunge marked an acceleration from a 30% decline in Tantan revenue in the third quarter. The company added on its earnings call that Tantan had 2.5 million paying users at the end of the year, down 14% from just three months earlier when it had 2.9 million users.

While Tantan only accounts for about 12% of Hello Group’s total, the huge drop in its revenue was a major factor behind the company’s overall 3.2% year-on-year revenue decline in the fourth quarter to 3.7 billion yuan.

Wang Li took over as Tantan’s CEO on an interim basis after last year’s management shakeup, and he noted on the company’s latest earnings call that “We were pleased to see that the entire management and execution team was in place (at Tantan) by the end of the year.” So, clearly the company isn’t saying openly that it could potentially jettison Tantan – at least not yet.

Investors weren’t too upbeat on the report, with Hello Group’s stock falling 5.1% in the two trading days after the results were announced. Here we should note that this particular selloff was relatively mild compared to what we’ve seen after other recent reports. And we should also point out that Hello Group’s shares are actually still up by nearly 50% from an all-time low reached in mid-March when all U.S.-listed Chinese stocks were getting hammered over delisting concerns.

Rising sentiment

Perhaps it’s the potential that Hello Group may finally jettison an ailing asset that has analysts suddenly becoming more bullish on the company. Or perhaps it’s more encouraging signals from its core Momo app or other newer initiatives, including an overseas expansion, which we’ll look at shortly. Whatever the reason, there’s no question that the many analysts that have loyally followed this company for years are becoming decidedly upbeat – at least about Hello Group’s stock price.

Of the 11 polled by Yahoo Finance in March, five rated the company a “strong buy,” another 10 rated it a “buy” and just one rated it a “hold.” That’s a huge improvement from February, when 12 analysts rated it a “hold,” and just eight rated it a “buy” or “strong buy.” They also set an average target price of $15.12, which is roughly double its current level.

At least part of the shift could owe to growing signals that the threat of forced delistings is receding as the U.S. securities regulator moves closer to a key information-sharing deal with its Chinese counterpart. But at least part of the optimism also looks tied to belief that Hello Group’s troubles may already be bottoming out and better times may lie ahead.

Then there’s also the company’s valuation, which looks quite low at a trailing price-to-earnings (P/E) multiple of just 5. By comparison U.S. peer Bumble BMBL trades at a much higher 19, which is what you would expect for fast-growing companies. Match Group MTCH, owner of the original Tinder, trades at a sky-high P/E ratio of 110, though the figure comes down to 29 on a forward basis. Still, there’s no question that Hello Group is quite undervalued compared to those two peers.

We’ll close with a look at Hello Group’s original Momo business, and also its young overseas operations that include services in the Middle East and Indonesia. While the company’s overall revenue was down, revenue from Momo actually grew 6% during the latest quarter and now accounts for 83% of Hello Group’s total.

The company said it expects overall revenue to fall by 7.8% to 10.7% in the first quarter – far worse than the fourth-quarter decline – indicating not only that Tantan’s revenue will continue to drop but that Momo may also fall too. But analysts are predicting the trend should bottom out later this year, forecasting an 8% rise in 2022 revenue compared to 2021’s level.

Lastly, there are Hello Group’s international initiatives that are still in early phases but could become future growth engines as they chase lonely hearts in other developing markets. The company was upbeat on its SoulChill service being rolled out in the Middle East, though added it’s still in the early stages of monetization. And it said its Indonesia based version of Tantan is also doing well, with that service’s revenue from December at 1.4 times that for Tinder in the market.