2 Catalysts, 4 Key Risks And A Buy Rating For Momo

At the time of writing, Momo shares were rallying 5.24 percent to $37.96.

Analysts Fan Liu, Piyush Mubayi, Ronald Keung and Sef Chin expect the company's addressable user base to expand on the back of its broader value proposition, rising user time spent and increasing stickiness.

See also: Facebook Continues To Prove It Can Monetize Its Users

The analysts noted that the company is transforming from a unique location-based social network, linking strangers to an entertainment platform containing a variety of content, including live streaming, short videos and social games.

Catalysts And Key Risks

Specifically, Goldman Sachs sees two catalysts for the company, namely 1) continuous product innovations and 2) the ongoing offering of new-format entertainment content.

The firm expects the company to provide a series of updates in the coming months for improving the features of version 8.0 launched on July 12.

New format entertainment content such as in-house developed games, variety shows and talent competitions held in the year-end helps attract new users and also increase the engagement of existing users, the firm noted.

Along with the catalysts, the firm also listed risks to its outlook:

• User fatigue.
• Negative regulatory development.
• Intensified competition.
• Ineffective execution.

Goldman Sachs expects 2018 to 2021 revenues and net income to rise at a compounded annual growth rate of 24 percent and 28 percent, respectively, thanks to expanding user base, ARPU and operating margin. The firm indicated that it is 5 percent above the Bloomberg consensus earnings per share estimate for 2017.

On valuation, the firm said, "Our target P/E multiple of 22X (also in line with average 1-yr forward P/E since MOMO's IPO in 2014) is derived at 1SD lower than the historical trading range (since 2012) of global peers, given that MOMO is still a niche player in social networking unlike big platform peers such as Tencent Holdings Ltd TCEHY and Facebook Inc FB that cater to mass demand."