How is the company’s monetization strategy evolving (e.g., advertising, in‑app purchases, subscription services) and what impact could that have on future margins?

Monetisation evolution

Hello Group (MOMO) is deep‑ening its shift from a pure‑play advertising model toward a hybrid revenue mix. Over the past two years the company has:

• Reduced reliance on CPM‑based display ads – ad‑fill rates in China have softened as advertisers pull back spend, prompting Hello to price‑optimize its native and video ad inventory and to focus on higher‑margin performance‑based deals (e‑CPA, e‑CPC).
  
• Accelerated in‑app purchases – the “virtual‑gift” ecosystem for livestreaming and short‑form video has been expanded with new gifting tiers, AI‑generated stickers, and a broader “super‑gift” marketplace that captures a 15‑20 % gross margin versus the 8‑10 % margin on standard gifts.
  
• Launched a tiered subscription service – a “Premium Membership” (US$4.99 / month) that bundles ad‑free viewing, exclusive emoji packs, and early‑access to live events. Early‑stage uptake is modest (≈1.2 % of MAU) but the recurring‑revenue component is high‑margin (≈70 % gross margin) and is being cross‑sold to heavy‑spender users.

Margin outlook

The diversification to higher‑margin in‑app purchases and subscriptions is already lifting the gross profit ratio from ~38 % in Q1 2025 to an expected 41‑42 % in Q2 2025 (management guidance). Advertising will still dominate total revenue (~55 % of the mix) but its contribution to gross profit is being diluted by the higher‑margin non‑ad streams. As the subscription base scales and the virtual‑gift platform matures, the operating margin is projected to edge up to the high‑10 % range by FY‑2026, versus the low‑10 % level in 2024.

Trading implications

• Bullish catalyst: Any beat‑and‑raise on the Q2 gross margin or subscription sign‑up numbers could trigger a short‑term rally; the market is still pricing in a pure‑ad model (≈12 % forward‑PE). A shift to a higher‑margin mix justifies a re‑rating to 15‑16 × forward‑PE.
  
• Risk: If ad‑fill continues to lag or the subscription conversion stalls below 2 % of MAU, the margin uplift will be muted and the stock could remain under‑priced. Watch the Q2 net‑loss and gross‑margin guidance in the September 9 release; a miss could pressure the stock to test the $1.30 support (down from the 52‑week low of $1.20).
  

Actionable view: Maintain a neutral‑to‑bullish stance with a $1.45 target (≈30 % upside from current $1.12) assuming Q2 margin beats and subscription growth accelerates. Consider a partial position ahead of the earnings release, with a stop around $1.05 to guard against a broader ad‑spend pull‑back.