Is Hello Group Inc (NASDAQ:MOMO) Trading at a Significant Discount to Its Intrinsic Value?

In the volatile world of tech stocks, identifying undervalued opportunities requires a blend of quantitative rigor and strategic insight. Hello Group Inc (NASDAQ:MOMO), the Chinese social networking giant, has long been a polarizing name among investors. While its domestic user base has shown signs of stagnation, the company's recent financial performance and aggressive overseas expansion have sparked debates about its intrinsic value. This article delves into a Discounted Cash Flow (DCF) valuation and relative fair value analysis to determine whether Hello Group is trading at a significant discount to its true worth.

DCF Valuation: A Case for Undervaluation

The DCF model, a cornerstone of intrinsic value analysis, estimates a company's worth by discounting its future free cash flows to their present value. For Hello Group, the inputs are compelling:
- Free Cash Flow Projections: Analysts forecast Hello Group's free cash flows to grow from RMB325.9 million in 2026 to RMB1.09 billion by 2035, with a compound annual growth rate (CAGR) of ~9.3%. This trajectory, though modest compared to its explosive early years, reflects a maturing business prioritizing profitability over hypergrowth.
- Discount Rate: The weighted average cost of capital (WACC) is calculated at 5.92%, derived from a low beta of 0.49 and a robust tax rate of 21.53%. This low discount rate amplifies the present value of future cash flows.
- Terminal Value: A conservative 2.9% perpetual growth rate (aligned with 10-year government bond yields) results in a terminal value of RMB18 billion, discounted to RMB7.2 billion in present value terms.

Combining these, the DCF model yields an intrinsic value of US$10.21 per share, compared to Hello Group's current share price of US$8.43. This represents a 16% discount to intrinsic value—a significant margin of safety for risk-aware investors.

Relative Valuation: A Tale of Two Metrics

Hello Group's valuation appears even more compelling when compared to industry peers. While its trailing P/E ratio of 6.48 is a fraction of the Internet Services & Social Media industry average of 22.64, its price-to-sales (P/S) ratio of 0.703 (market cap of $1.016 billion vs. revenue of $1.447 billion) is a mere 8.6% of the industry average of 8.089.

This stark discount can be attributed to two factors:
1. Domestic Market Challenges: Declining user metrics (e.g., 40.8% fewer paying users on Momo and 27.3% on Tantan) have dampened investor sentiment.
2. Overseas Growth Premium: While Hello Group's domestic struggles are well-documented, its 71.9% year-over-year surge in overseas revenue (now 16.4% of total revenue) is often overlooked. The MENA region, in particular, has emerged as a high-growth market, with Tantan's localized features attracting users in Egypt, Saudi Arabia, and Morocco.

Risks and Counterarguments

Critics of Hello Group's valuation highlight several risks:
- User Decline: The erosion of domestic user metrics could persist, especially with intensifying competition from rivals like Alibaba's Youku and Tencent's WeChat Moments.
- Regulatory Headwinds: China's evolving data privacy laws and content moderation policies pose operational risks.
- Overseas Execution: Sustaining the 71.9% growth in overseas revenue will require significant capital and cultural adaptation.

However, these risks are already priced into the stock. Hello Group's ROIC of 9.94%, well above its WACC of 5.92%, demonstrates its ability to generate excess returns despite these challenges. Furthermore, its $1.76 billion cash hoard and share repurchase program (47.8 million ADSs at $6.07 average price) signal management's confidence in the stock's undervaluation.

Investment Thesis: Buy with Caution

For investors with a medium-risk tolerance, Hello Group presents a compelling case. The 16% discount to intrinsic value, coupled with its underappreciated overseas growth and strong balance sheet, creates a margin of safety. However, the stock is not without its caveats.

Key Catalysts for the Bull Case:
- MENA Expansion: If Hello Group's overseas revenue reaches 25% of total revenue by 2026, its P/S ratio could re-rate from 0.703 to 5.0+, unlocking $15–$20 per share in value.
- Cost Discipline: Management's focus on tax efficiency and operating margin improvement (projected 12–13% non-GAAP operating margin in Q2 2025) bodes well for long-term profitability.
- Dividend Yield: A 5.5% yield from the special dividend (US$0.30 per ADS) adds income to the capital appreciation story.

Bear Case Risks:
- A prolonged slowdown in China's social media sector or a regulatory crackdown could pressure user metrics further.
- Macroeconomic volatility (e.g., a global recession) might dampen overseas ad spend.

Conclusion

Hello Group Inc is trading at a significant discount to its intrinsic value, supported by both DCF and relative valuation metrics. While its domestic challenges are real, the company's overseas expansion, profitability, and shareholder-friendly policies position it as a high-conviction opportunity for investors who can tolerate near-term volatility. For those seeking undervalued tech stocks with a global growth narrative, Hello Group deserves a closer look—but not without a clear understanding of its risks.