Shares of several Chinese streaming video companies dropped on Sept. 17 after the South China Morning Post reported that internet content platform ByteDance would add licensed and original TV shows and movies to its Xigua Video app next year. Xigua is one of ByteDance's three biggest apps, alongside news aggregator app Jinri Toutiao and short video app Douyin (also known as Tik Tok).
Xigua has over 100 million monthly active users (MAUs), Douyin has over 150 million MAUs, and Jinri Toutiao reaches more than 200 million MAUs. ByteDance also owns Houshan Zhibo, a live video streaming platform for thousands of social media influencers, and a growing list of smaller music and media apps.
ByteDance's meteoric growth, fueled by its popularity with Gen Z users, has stunned streaming video leaders like Tencent (NASDAQOTH:TCEHY) Video and iQiyi (NASDAQ:IQ). Those two platforms still lead China's video streaming market with nearly a billion combined MAUs, and they're the top two choices for streaming mainstream TV shows and films.
ByteDance's move from user-generated content toward mainstream shows and movies could clearly cause problems for Tencent Video and iQiyi, and shares of Tencent and iQiyi dropped after the report. However, the sell-off also hit YY (NASDAQ:YY) and Momo (NASDAQ:MOMO) -- which aren't actually in ByteDance's blast zone. Let's see why YY and Momo are better shielded from ByteDance's video expansion than Tencent and iQiyi.
Different business models
YY's core live video streaming platform, YY Live, hosts music, entertainment, sports, and e-learning videos. Most of that content is generated by its users. Viewers can buy virtual items to unlock premium content from their favorite broadcasters, or simply buy them virtual gifts. YY splits those proceeds with its broadcasters.
YY also previously ran a Twitch-like video game streaming site, Huya, which it spun off in an IPO earlier this year. YY remains Huya's top shareholder. YY also generates a small percentage of revenue from its older online gaming, membership, and advertising businesses, which the company is phasing out to concentrate on the growth of its video streaming business.
Momo's main app is often called the "Tinder of China". It lets users find each other via their locations and profiles, and is frequently used as a dating app. Momo also recently acquired the other so-called "Tinder of China", Tantan, to expand its user base. Momo also launched a premium subscription service earlier this year that offered better matchmaking and search exposure features.
Last year Momo launched a live video streaming feature for its main app. That business, which also relied on virtual gifts and revenue sharing deals with broadcasters, became Momo's main source of growth. To expand its online video ecosystem, Momo co-produced a reality show called Phanta City earlier this year.
As you can see, YY and Momo mostly depend on user generated content instead of scripted shows or movies. Therefore it doesn't make sense to compare either company to Tencent Video, iQiyi, or ByteDance's push into premium TV shows and movies -- it would be like comparing Tinder or Twitter's Periscope to Netflix.
Healthy growth rates and low valuations
ByteDance might be capturing a lot of Gen Z viewers with its short-form videos, but YY and Momo are still posting robust growth.
YY's revenue rose 45% last quarter against the comparable prior-year period. Its mobile live streaming MAUs grew 21% year over year to 80.2 million, and its paying users rose 21% to 6.9 million. Since user-created video content is a higher margin business than licensed or original content, YY's non-GAAP net income surged 51% during the quarter. Analysts expect YY's revenue and earnings to grow 34% and 10%, respectively, this year.
Momo's revenue jumped 58% last quarter versus the prior year as MAUs on its core app grew 18% to 108 million. Its total number of paid users rose 63% to 11.6 million (including an additional 3.1 million paid users from Tantan) as non-GAAP net income surged 90%. Wall Street expects Momo's revenue to rise another 54% this year, and for its earnings to grow 45%.
Those growth rates indicate that neither company is losing significant ground to ByteDance's expanding ecosystem of video apps. That's probably because YY and Momo's top broadcasters have already cultivated dedicated viewer bases on their platforms, which shower them with steady revenue via virtual gifts.
Both YY and Momo have been weighed down by trade fears over the past year. As a result, YY trades at just 8 times forward earnings, and Momo has a forward P/E of 15. Those are dirt cheap valuations for high-growth companies in a red-hot sector.
Await further misunderstandings...
YY and Momo subsequently bounced back from their declines on Sept. 17, but investors should keep an eye out for similar buying opportunities in the future. Both stocks are cheap relative to their growth potential, and neither company will be derailed by ByteDance anytime soon.