Momo (NASDAQ:MOMO) and iQiyi (NASDAQ:IQ) have a few things in common. They are both Chinese internet stocks cashing in on the country’s growing appetite for streaming video. They are both generating double-digit revenue growth, though the pace is decelerating sharply for both companies lately.
Both stocks also happened to bottom out on the exact same day, Jan. 2, earlier this year. Momo and iQiyi have managed to deliver double-digit returns in 2019 — no easy feat given investor disinterest in Chinese equities as a result of the economic slowdown in the country and escalating trade tariff tensions with the U.S. — but this is where the two names start to drift apart. iQiyi’s stock is up just 11% this year. Momo is up a whopping 47% year to date.
The business models at iQiyi and Momo are entirely different, of course. iQiyi is a streaming site of curated content, along the lines of YouTube or Netflix. It does offer a premium-subscription product that recently topped 100 million paying accounts, but it’s also more widely consumed as an ad-supported platform for folks unwilling or unable to pay. There were more than 400 million monthly active users on mobile and another 400 million monthly active users on PC — with a lot of overlap between the two groups — at the time of iQiyi’s IPO last year.
Momo runs online dating and social discovery sites, and it’s much smaller than iQiyi in terms of reach. There were 113.5 million monthly active users as of the end of June, but just 11.8 million of them were paying users across its collection of sites for live video and value-added services.
However, the model also brings us to the biggest difference of all between Momo and iQiyi, and that is profitability.
Momo’s users willingly create the streaming content, unlike iQiyi, which has to shell out a lot of money to production studios and distributors for its video entertainment. Momo’s users also pay to bestow virtual gifts on other users, another high-margin revenue stream in which Momo keeps a good piece of the action. At the end of the day, Momo is very profitable. Despite its buoyant stock price this year, Momo can be had for just 13 times this year’s earnings and a little more than 10 times next year’s forecast. iQiyi isn’t anywhere close to turning the corner of profitability. Analysts see losses continuing until 2022 at the earliest.
China’s cooling economy has iced down the once-red-hot online advertising market, and business is slowing at both companies. iQiyi’s revenue climbed 15% in its latest quarter after clocking in with year-over-year bursts between 40% and 48% in each of the five previous periods. Momo’s holding up better with 32% top-line growth in its latest report, but its guidance calls for a gain between 17% and 19% in the third quarter, which it will announce in a few weeks.
Tossing iQiyi and Momo into the same ring may not seem like a fair fight. Momo is growing faster, and it’s actually profitable. However, a quick detour to discuss moats is in order. The popularity of social apps can be unsteady. It’s a lot harder to launch a full-featured streaming video service, and iQiyi’s steep losses now — at a time when hesitant investors aren’t likely to seed smaller players in this profitless niche — are actually bankrolling its expanding content catalog during the economic lull. By the time sentiment turns positive, iQiyi could have an insurmountable lead in this growing industry.
Both stocks are trading at compelling price points now, and both are positioned well to beat the market. iQiyi has the stronger moat here, but the “better buy” nod this time around belongs to Momo with its high-margin model, growing business, and cheap valuation.