Many growth stocks sit near multi-year highs in today's frothy market. That's why many investors are probably shunning these highfliers until a correction knocks them back down to cheaper levels.
While that approach is prudent, investors should note that stocks that hit new historic highs often keep hitting new highs. Two Chinese social-media stocks -- Weibo (WB 0.11%) and Momo (MOMO 0.64%) -- clearly demonstrate this trend.
Weibo rallied 175% over the past 12 months and Momo soared 150% -- even as the bears criticized both stocks as being too expensive. Weibo now trades at 146 times earnings, which is much higher than its industry average of 36. Momo, which belongs to the same industry, trades at 53 times earnings.
While that lower multiple might make Momo look like a "safer" investment than Weibo, I believe that Weibo remains a better growth play for three simple reasons.
1. A wider competitive moat
Momo's social-networking app lets users find and contact nearby users through their personal profiles. The app is often called the "Chinese Tinder," thanks to its frequent use as a dating tool. Momo also runs a live streaming video platform that enables viewers to buy virtual gifts from Momo for their favorite broadcasters, as well as a mobile gaming platform. Its network reached 81.1 million monthly active users (MAUs) at the end of 2016, which marked a 16% increase from a year earlier.
Weibo's microblogging platform resembles a mix of Twitter, Facebook, Reddit, and other portal sites. Its expanding ecosystem includes a live video streaming platform similar to Momo's and is integrated with Alibaba's mobile payments and e-commerce platforms. Weibo's MAUs rose 33% annually to 313 million last quarter.
Momo's revenue surged 524% annually to $246.1 million last quarter, but most of that growth came from its live-streaming platform -- which accounted for 79% of that total. That leaves it very vulnerable to other challengers -- such as Weibo and Tencent's (TCEHY -2.49%) WeChat -- in the live-streaming market. Moreover, Chinese regulators have repeatedly threatened to shut down live video platforms, claiming that they promote illegal activities.
Weibo's revenue rose by a "less impressive" 70% to $212.7 million last quarter, but 88% of that total came from diverse advertising and marketing revenues across its entire network. Live video streaming revenue was included in its value-added services revenue, which accounted for the remaining 12% of its top line.
Weibo remains the preferred social-media tool of top celebrities in China, with top accounts attracting 80 million to 90 million followers. These factors give Weibo a much wider moat than Momo, which could be marginalized by more popular social apps such as WeChat.
2. More sustainable revenue and earnings growth
Momo's 313% sales growth in 2016 looks astounding, but that growth is expected to slow to 107% this year and 32% next year as the momentum from its live video boost fades. That's why investors should note that Momo's actual MAU growth is much slower than Weibo's -- which means that its user growth could peak and it could run out of new ways to monetize users.
On the bottom line, Momo's earnings are expected to rise 63% this year and 35% next year. But those estimates might be too bullish if Momo invests more heavily in R&D and marketing to develop and launch new products to expand its ecosystem.
Weibo's revenue rose 37% in 2016, but analysts expect that growth to accelerate to 50% this year before "cooling" to 36% next year. Those growth estimates can't match Momo's, but they look more sustainable -- since Weibo has superior MAU growth and a more diversified business model. Weibo's earnings are expected to grow 61% this year and 49% next year.
3. On the shoulders of giants
Weibo's biggest backers are its former parent company SINA (SINA), which spun off the company in an IPO in 2014, and Alibaba. That support enables Weibo to integrate its platform with SINA's news feeds and Alibaba's Tmall, Taobao, and Alipay e-commerce ecosystems.
It also gives Weibo the muscle to counter the growth of monolithic "super apps" such as WeChat, which enable users to perform a wide variety of tasks -- such as hailing cabs, making payments, and ordering food -- from within a single app. Weibo also backs a Vine-like app called Miaopai.
Momo lacks the backing of comparable tech giants, which could make it tough for the app to continue growing if its MAU growth peaks. Momo also must keep at bay a growing number of hot apps, which include Miaopai and the photo app Kuaishou. Doing so could be tough on its bottom-line growth.
The key takeaway
At first glance, Momo's triple-digit sales growth might make it seem like a better growth stock than Weibo. But if we look closer at both companies' business models, moats, and backers, it becomes clear that Weibo is a better all-around play on the growing social-media market in China.