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Why Momo Stock Lost 21% in May

What happened

Shares of Momo (NASDAQ: MOMO), the Chinese online-dating specialist, headed lower last month after the company said it was suspending the ability of Momo users to post to social news feeds for one month starting on May 11. The decision came in response to a government crackdown on social-media content that doesn't comport with the communist government's expectations, and a similar revelation in April that Momo's dating app Tantan had been removed from some mobile-app stores at the direction of the Chinese government.

As a result, the stock gave up 21% during May, according to data from S&P Global Market Intelligence, though the company recouped some of those losses after reporting first-quarter earnings on May 28.

Image source: Getty Images.

As the chart below shows, the stock's sell-off came over the first half of the month, as the company announced the news-feed suspension and investors reacted to rising trade tensions between the U.S. and China:

MOMO data by YCharts.

So what

Shares of Momo dipped 10% on May 10 as the company made the announcement, saying that it would suspend the news feeds as part of an effort to strengthen content-screening efforts in accordance with the Chinese government's demands. The news was the latest sign that a government crackdown could impact Momo's business, as the news feed is a key component of the app.

The stock reacted similarly on April 29 when the news about Tantan broke. Management said it would use the one-month suspension to evaluate the impact on its overall business and perform other self-inspections.

Despite those headwinds, the company topped estimates in its first-quarter earnings report, and the stock rose 5% on May 28. Revenue in the quarter jumped 35% to $554.7 million, easily beating expectations of $526.7 million. Costs increased in a number of categories, including revenue sharing with broadcasters, and hiring and marketing expenses; this led to adjusted earnings per share falling from $0.65 to $0.62, though that still beat expectations of $0.54.

Now what

Momo shares have bounced back in June, gaining 15% through June 10 on bullish macroeconomic news, and hopes that a thaw in U.S.-China trade tensions will follow a resolution in U.S.-Mexico negotiations. June 11 will be a key day for investors to watch, as that's the planned end of Momo's suspension of users' news feeds. Keep an eye on the company to see if that capability returns as management has indicated.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Momo. The Motley Fool has a disclosure policy.


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