Two Chinese tech companies, Baidu (NASDAQ:BIDU) and YY (NASDAQ:YY), both recently spun off their streaming video units as IPOs. Baidu spun off iQiyi (NASDAQ:IQ), the largest online video platform in China, in late March. YY spun off its gameplay video streaming unit Huya (NYSE:HUYA) in mid-May.
iQiyi only advanced 13% since its IPO as of this writing, while Huya surged nearly 90%. Why did investors have such different opinions about these two stocks? Let's examine their businesses, growth rates, and potential headwinds to find out.
What do iQiyi and Huya do?
iQiyi offers video content from China, as well as overseas content from partners like Lions Gate, Paramount, Netflix, and Japan's Fuji TV. It generates revenue via a freemium model -- users can watch free ad-supported content, purchase a la carte programs, or buy paid subscriptions for ad-free content and exclusive programs.
Baidu retained a 70% stake in iQiyi after the spinoff. The platform's biggest competitors are Tencent (NASDAQOTH:TCEHY) Video and Alibaba's Youku Tudou.
Huya, often called the "Twitch of China", is the country's largest live streaming platform for video games. It also runs on a freemium model, in which viewers can buy virtual gifts for their favorite broadcasters to unlock premium features. Huya splits those revenues with its broadcasters.
YY remains Huya's controlling shareholder, while Tencent owns nearly 35% of the company, with an option to eventually boost its stake above 50%. Huya's biggest rival is Douyu, which is also backed by Tencent.
How fast is iQiyi growing?
iQiyi finished 2017 with 424.1 million MAUs (monthly active users) on PCs. Its mobile MAUs rose 4% to 421.3 million as its paid subscribers surged 68% to 50.8 million. Daily active user hours grew 16% to 300.1 million, as its mobile users spent an average of 1.7 hours on the platform.
During the first quarter, iQiyi's total revenues rose 57% annually to 4.9 billion RMB ($777.6 million). Its membership services revenue jumped 67% to 2.1 billion RMB ($334 million), supported by the launch of several premium original content titles and promotions during the Chinese New Year.
Its ad revenues grew 52% to 2.1 billion RMB ($366.5 million), fueled by the more efficient monetization of its brand advertising business, an expanding library of free content, and the growth of its in-feed advertising business. Its content distribution revenues rose 44% to 266.7 million RMB ($42.5 million), supported by the licensing of several drama series to external partners.
How fast is Huya growing?
Huya's average MAUs rose 30% to 83.4 million last year as its mobile MAUs jumped 75% to 36.2 million. The average mobile MAU spent 98 minutes per day on the app, up from 91 minutes in 2016. However, its average number of active broadcasters dropped 15% to 560,000 due to new real-name registration regulations for internet platforms.
95% of Huya's revenues came from virtual gift sales last year. Its total number of paying users rose 63% annually to 2.8 million during the fourth quarter, as its monthly active broadcasters rebounded with 11% year-over-year growth to 610,000. Its total average MAUs rose 17% to 86.7 million during the quarter as its average mobile MAUs jumped 48% to 38.8 million.
Huya's total revenues rose 174% to 2.18 billion RMB ($355.8 million) last year, and climbed 107% to 692.7 million RMB ($106.5 million) in the fourth quarter.
How profitable are iQiyi and Huya?
Huya has stronger top-line growth than iQiyi, but neither company is profitable on an annual basis yet due to high content acquisition and infrastructure costs.
iQiyi's net loss widened from 3.07 billion RMB to 3.74 billion RMB ($574 million) in 2017. However, its net loss narrowed from 1.1 billion RMB to 395.7 million RMB ($63 million) between the first quarters of 2017 and 2018.
Huya's net loss narrowed from 625.6 million RMB in 2016 to 81 million RMB ($12.4 million) in 2017. It posted a net profit of 4.98 million RMB ($765 million) during the fourth quarter, compared to a loss of 137.6 million RMB a year earlier.
Both companies could achieve consistent profitability over the next few quarters. However, escalating competition could also force them to ramp up their marketing expenses. iQiyi barely remains ahead of Tencent Video in terms of total MAUs. Huya is much bigger than Douyu, which had just 13 million MAUs last year. But a higher percentage of Douyu's registered users are active, according to iiMedia Research.
The valuations and verdict
Based on growth figures alone, Huya is clearly the better buy. However, Huya's post-IPO pop has boosted its market cap to $4.5 billion -- which gives it a lofty P/S (price-to-sales) ratio of 13. iQiyi, however, trades at less than five times trailing sales.
Those valuations indicate that iQiyi is probably the safer investment. Huya has phenomenal growth, but there's too much optimism baked into the stock at these levels.