Hello Group's Overseas Surge: Can International Expansion Salvage Domestic Stumbles?

Hello Group Inc. (NASDAQ: MOMO), the parent company behind the popular Momo app, reported its Q1 2025 earnings this week, revealing a stark divergence between its domestic struggles and overseas triumphs. While revenue dipped slightly year-over-year, profitability soared, driven by aggressive localization of its international apps and cost-cutting measures. The results underscore a strategic pivot: Hello Group is betting its future on global markets to offset slowing growth in China, where its core platforms face headwinds.

The Numbers Tell a Story of Contrasts

Net revenues for the quarter fell 1.5% to RMB2.52 billion (US$347.4 million), weighed down by declining user engagement in its flagship Momo app and Tantan, a dating platform. Monthly Active Users (MAU) for Tantan dropped to 10.7 million from 13.7 million a year ago, while paying users on Momo plummeted by nearly half. These declines highlight a deepening challenge in retaining domestic users amid intensifying competition and shifting consumer preferences.

Yet profitability surged. Net income jumped to RMB358 million (US$49.3 million), up from a mere RMB5.2 million in Q1 2024, thanks to cost discipline and a 71.9% leap in overseas revenue to RMB414.6 million. The company's newer international apps—Hertz, Soulchill, Duidui, and Tietie—are now critical growth engines.

Why Overseas Growth Matters

The overseas revenue surge is no accident. Hello Group has methodically tailored its products to local markets, from Southeast Asia to Latin America. For instance, Hertz, a dating app, has gained traction in Brazil by emphasizing video-based interactions, while Soulchill targets Gen Z users with gamified social features. These efforts are paying off: overseas revenue now accounts for roughly 16% of total revenue, up from 9% a year ago.

The strategy is also financially efficient. While domestic markets grapple with saturation and regulatory scrutiny, overseas expansion allows Hello Group to leverage its core strengths—social networking and live-streaming—without the same level of competition. Meanwhile, higher margins from international monetization could further boost profitability if user acquisition costs stabilize.

The Domestic Dilemma

The flip side is domestic stagnation. Momo's MAU has been declining for years, and its paying users are now fewer than half of 2024 levels. Tantan's slide is equally concerning, with MAU down 22% year-over-year. Analysts attribute this to waning app engagement, a crowded market, and broader economic factors: Chinese consumers are spending less on premium social services amid weak income growth.

The company's response? Double down on cost-cutting. Operating expenses rose just 5.4%, but marketing spend for overseas apps likely absorbed much of that increase. While this prioritizes global growth, it risks neglecting domestic platforms. Without innovation or reengagement strategies, Momo and Tantan could become cash drains rather than core assets.

Valuation and Risks

Analysts project a 19.18% annual earnings growth over the next year, with an average price target of $8.97—43% above its current price of $6.25. This optimism hinges on two assumptions: overseas revenue continues its blistering pace, and domestic losses stabilize.

However, risks loom. Regulatory shifts in China—such as stricter data laws or app store policies—could stifle domestic operations. Meanwhile, overseas markets are not immune to competition or cultural missteps. The company's reliance on live-streaming and value-added services, which account for most revenue, also exposes it to macroeconomic downturns.

Investment Takeaway

Hello Group's Q1 results are a mixed bag, but the narrative is clear: overseas expansion is the only bright spot. For investors, the stock presents a high-risk, high-reward opportunity. Those willing to bet on the company's localization prowess and cost discipline could see outsized returns if international growth outpaces domestic declines.

Historically, a buy-and-hold strategy around earnings announcements has been volatile. Backtests from Q1 2020 to Q1 2025 show that purchasing MOMO on earnings announcement days and holding for 30 trading days resulted in a negative compound annual growth rate (CAGR) of -9.69%, accompanied by a maximum drawdown of -72.79%. While the stock often rebounded after initial declines, the overall strategy carried significant risk, underscoring the importance of patience and a long-term outlook.

But patience is required. The stock's current valuation leaves little room for error—should overseas momentum stall or domestic losses widen, the rally could reverse. Investors should monitor MAU trends in newer apps and track the company's ability to scale overseas operations without excessive costs.

In short, Hello Group's future hinges on whether it can transform its global gamble into sustainable growth. For now, the earnings report offers a glimmer of hope—but the real test is yet to come.