Chinese growth stocks are starting to show signs of life after a rough second half of 2018. Shares of Momo (NASDAQ:MOMO) and iQiyi (NASDAQ:IQ) are up 34% and 48%, respectively, since bottoming out on Jan. 2. Investors in the dot-com speedsters are being rewarded for their heady growth, but Momo and iQiyi continue to trade well below their all-time highs, which coincidentally also happened around the same time in June of last year.
The stocks are rallying even though they have yet to face their first major test of 2019. iQiyi reports quarterly results next week, and Momo follows several weeks later. The stocks are bouncing back this year, but let's size them up to see which one is more deserving of a space in your portfolio.
Putting the momo back in Momo
The Chinese social-video and online-dating specialist had 110.5 million monthly active users of its apps at the end of September, 17% ahead of where it was a year earlier. Growing its top line three times as fast as its user growth is encouraging, showing that Momo is excelling at monetizing its audience.
Smoking out paying members used to be a challenge in China, but Momo and iQiyi are both excelling at growing their premium audiences. Momo's paying user count has gone from 7.3 million to 12.5 million over the past year. Momo's rise the past couple of years has come from the strength in its live-video broadcasting platform, now responsible for 76% of its revenue.
Momo is also very profitable. The stock is trading at 13 times last year's projected earnings and just 11 times this year's Wall Street goal. The same can't be said about iQiyi.
iQiyi is ready for its close up
China's leading video service may seem to be profitable given its trailing earnings multiple of 20, but that's a facade. A more than $2.5 billion gain in the fourth quarter quarter of 2017 is the accounting handiwork of a one-time accretion of redeemable convertible preferred shares. The real business here continues to post large deficits, and a week from now -- after iQiyi reports its fourth-quarter results -- trailing earnings will be rightfully in the red.
Analysts don't see iQiyi turning a profit until 2022 at the earliest, but that doesn't make this a bad investment. It has a dominant market position in a country that's protective of outsiders launching a streaming service in mainland China, so there's a moat to this business. It's also growing the most just where you want to see it making the strongest progress.
The lion's share of iQiyi's more than 500 million monthly active users are freeloaders -- enjoying the ad-supported platform -- but the real success story here is the healthy migration to premium subscribers. There were 80.7 million paying accounts by the end of September, an 89% surge over the past year. The push for original content that's working for most stateside platforms is also clicking for iQiyi. Membership-services revenue recently overtook online ad revenue as the largest top-line contributor.
Both companies trade at similar revenue-based multiples with Momo and iQiyi fetching an enterprise value that is three and 4.2 times top-line results, respectively. The dirt cheap price-to-earnings (P/E) ratio and healthy profitability would seem to shift this fight in favor of Momo, but there's more to this race than simply looking back. The future is more hazy for Momo than it is for iQiyi.
It will be a lot easier for Momo's platform to fall out of favor with Chinese users than it will be for iQiyi, with its far-reaching content-licensing deals. Social video can be fickle, especially as China's youth hops on the next new shiny platform. Momo may be growing slightly faster than iQiyi now, but that should change in 2019. Analysts see Momo's revenue growth decelerating to 21% in 2019, compared to a 32% projected pop for iQiyi's business.
Momo and iQiyi are strong investments that are trading at attractive price points here, but iQiyi gets the nod as the better buy given its more sustainable model -- something that's more important than near-term profitability.