Momo (MOMO +0.08%) and iQiyi (IQ 0.71%) are both often cited as high-growth plays on China's streaming video market. Momo went public in 2014 at $13.50 per share, and now trades in the mid-$40s. iQiyi went public at $18 per share this March, and currently trades in the mid-$20s.
Both companies are also backed by tech giants. Alibaba owned 21% of Momo when the company went public, but it subsequently reduced its stake to the single digits. Baidu (BIDU +0.04%) still owns a majority stake in iQiyi, which was originally its streaming video subsidiary.
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IHS Markit expects the Chinese online video market to more than quadruple in value from 22 billion RMB ($3.2 billion) to 96.2 billion RMB ($14 billion) between 2015 and 2020. That growth should be fueled by a growing number of broadband internet connections, the saturation of the smartphone market, and a government crackdown on pirated content.
So is Momo or iQiyi a better play on this long-term trend? Let's examine both companies to find out.
An apples-to-oranges comparison
Momo and iQiyi both generate most of their revenues from streaming videos, but the two companies have significantly different business models.
Momo's namesake app is a social networking platform that lets users find each other via shared profiles and locations. It's often called the "Tinder of China" because it's widely used as a dating app. Momo also owns Tantan, another dating app that is also called the "Tinder of China" because it clones Tinder's swiping features.
Momo launched a live video streaming feature for its core app last year that allowed individual users to reach large audiences. Momo monetized those streams with virtual gifts, which viewers could buy for their favorite broadcasters. Momo also generates revenue from a premium subscription tier, which provides better AI-powered matches, higher search exposure, and the ability to see who "likes" you.
Momo recently expanded beyond user-created content by co-producing a reality show called Phanta City, but it won't become a major player in original content anytime soon.
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iQiyi resembles Netflix on a freemium model. Its platform streams original shows and licensed content from studios like Lions Gate, Paramount, Fuji TV, and even Netflix. Viewers can either watch a limited amount of ad-supported content, or buy subscriptions to access ad-free and exclusive programs.
iQiyi mainly competes against Tencent (TCEHY +0.17%) Video. Each platform has over 500 million monthly active users. China Internet Watch recently reported that Tencent Video controlled 46.1% of China's online video market during the second quarter of 2018, compared to iQiyi's 43.6%, but it's still too early to crown a definitive market leader.
Which company is growing faster?
Momo's monthly active users (MAUs) on its core app grew 18% annually to 108 million last quarter. Its total number of paid users (including Tantan) rose 63% to 11.6 million. Its total revenues jumped 58% to $494.3 million, with live video revenues accounting for 83% of its top line. The rest of Momo's revenue comes from its older advertising and gaming businesses, as well as its newer value-added services unit.
Momo generates high margins from user-created content and virtual gifts. That's why its non-GAAP net income rose 90% annually to $140.2 million during the quarter as its GAAP net income grew 94% to $117.8 million. Wall Street expects that momentum to continue this year, with 54% sales growth and 45% non-GAAP earnings growth.
iQiyi's total subscribers rose 75% annually to 67.1 million (with 66.2 million paying non-trial subscribers) last quarter. That growth boosted its membership services revenue by 66% annually to 2.5 billion RMB ($374 million), or 40% of its top line. Advertising revenue rose 45% to 2.6 billion RMB ($396 million), or 42% of its revenue. The rest of iQiyi's revenues came from content distribution deals and other smaller businesses. The company's total revenue rose 51% to 6.2 billion RMB ($932.5 million).
iQiyi has much lower margins than Momo, since it relies heavily on original and licensed content. That's why it reported a net loss of 2.1 billion RMB ($316.9 million) last quarter, compared to a loss of 953.2 RMB in the prior year quarter. Analysts expect iQiyi's revenue to rise 33% this year, but its earnings should remain deep in the red. Investors should also recall that Baidu spun off iQiyi to remove the unit's losses from its bottom line.
An obvious winner
Momo's stronger sales growth, higher-margin business model, and bigger profits make it a much better play on China's streaming video market than iQiyi. Momo also trades at just 14 times forward earnings, making it an undervalued growth play on China's tech market. iQiyi still has decent growth potential, but it doesn't have much pricing power, and depends too heavily on pricey premium content.
