Recently, Mary Meeker of venture capital firm Kleiner, Perkins, Caulfield & Byers released her 2018 internet trends report. While there were several stars of this year's report, the biggest may have been China, which is now home to nine of the top 20 internet companies in the world, up from just two in 2013. Specifically, we're talking the mobile internet, with Chinese cellular data usage accelerating a massive 162% in 2017.
The biggest segment within the Chinese mobile internet? Online video. In just two years, online video in China has surged from 13% of mobile media time to 22% of mobile media time. Last year, in fact, content spending by the leading Chinese streamers surpassed "traditional" Chinese TV content spend for the first time ever.
There are three clear leaders riding this wave, all of which have ties to the "big three" of China, or the "BAT": Baidu (NASDAQ:BIDU), Alibaba (NYSE:BABA), and Tencent (OTC:TCEHY). For investors interested in riding the Chinese streaming video trend, the following are definitely the stocks to own.
iQIYI (NASDAQ:IQ) was recently spun off from Baidu (which still owns a majority stake), selling 125 million ADR shares in an IPO just this past April. Investors can choose to own the diversified tech giant Baidu or the streaming pure-play iQIYI. Each ADR represents 7 Class A shares, with the IPO representing about 21.8% of the total diluted shares owned by both the public and Baidu.
iQIYI has both ad-supported and VIP subscription services, and its revenue is just about evenly split between those two segments. At the end of 2017, iQIYI had 50.8 million subscribers out of 421.3 million monthly active users ("MAUs"). That's about half the subscriber count of Netflix (NASDAQ:NFLX), which is remarkable considering iQIYI only operates in just one country. That subscriber number was also up a stunning 67% from 2016.
iQIYI just had its first quarterly earnings release as a public company, reporting that it grew revenue 57%, an impressive acceleration over the 55% growth of 2017. The company also announced a partnership with number two e-commerce player JD.com (NASDAQ:JD), allowing new subscribers of either company's premium service access to the other company's service for one year. That really speaks to the strength of iQIYI's content and position, considering that JD itself is 21.25% owned by Tencent, which is iQIYI's biggest rival.
If iQIYI's growth numbers were impressive, Tencent Video's numbers are downright mind-boggling. In 2017, paid subscriptions surged 121% to 56 million, beating out iQIYI by roughly 5 million; however, neither company gives its subscriber count each quarter (just year-end), so it's unclear which service has the higher subscriber count at the moment.
Tencent does disclose growth rates, however, and last quarter subscription revenue grew 85% while ad revenue grew 64%, for a total video revenue growth rate of 75%.
Tencent is benefiting from several competitive advantages -- namely, it's the largest video game publisher in the world, has a dominant market share in music streaming in China, and owns a majority of online publisher and e-book company China Literature. Needless to say, that's a lot of places from which Tencent Video can obtain IP to create new shows, whether based on music, comic books, or video games.
Oh, and there's one other advantage Tencent Video has -- the dominant, 1 billion-user WeChat social media platform. Not a bad pool from which to recruit new subscribers!
Youku Tudou is currently owned by Alibaba and known to be the number three player, behind iQIYI and Tencent (it doesn't release subscriber numbers). Formed by the merger of streaming services Yukou and Tudou in 2012, the combined platform was bought by Alibaba in 2016.
In the past fiscal year, Youku Tudou grew subscribers 160% year over year, though again, Alibaba doesn't release its subscriber count. In an effort to catch up to rivals, the company recently inked a licensing deal with NBC Universal and Sony Pictures Television to get high-end American content onto its platform, countering iQIYI's 2017 licensing deal with Netflix.
Given Youku's link to the largest e-commerce platform and largest cloud player in China, I wouldn't count it out, even if it's currently number three.
A sea of red
One thing to be aware of: Each Chinese streaming service is losing money, and lots of it. It's currently estimated that each service is losing about a half a billion dollars per year.
Of course, as Netflix's outperformance has shown, losses don't matter in the world of streaming video, only subscribers! Investors shouldn't shy away from these companies on that count -- the growth opportunity is simply too large to pass up.