A pair of international streaming giants entered the stock market last year. Spotify Technology (NYSE:SPOT) and iQiyi (NASDAQ:IQ) went public within a few days of one another in the spring of 2018, and how successful they are depends on where you draw the starting line. iQiyi kicks off this week 54% above its IPO price. Spotify is up just 15% from its direct listing's reference price of $132.
However, Spotify stock is essentially where it was at the close of its first day of trading. iQiyi is faring considerably better -- it was a broken IPO out of the gate -- but both stocks are trading well below last year's highs. iQiyi remains the top dog in video streaming in China. Luxemboug-based Spotify has been able to throw a wider global net for its streaming music service, including a strong U.S. presence. Let's size up Spotify and iQiyi to see which stock has the best chance to beat the market in the year ahead.
Spotify and iQiyi are cashing in on the growing popularity of streaming services. The global migration to mobile devices is providing a welcome tailwind to both companies.
China's iQiyi is growing much faster than Spotify. Revenue at iQiyi rose 55% in the fourth quarter, ahead of both its own guidance and Wall Street forecasts. The pace is nearly twice the 30% top-line gain that Spotify mustered during the same three-month period.
The two companies are doing a good job of converting freeloaders of their ad-supported platform into paying subscribers, but even that path isn't working out the same for both of them. Premium subscriptions are a game changer for iQiyi, as the 76% pop in membership-services revenue was able to lift a pedestrian 9% uptick in advertising revenue for its latest quarter. Spotify's average revenue per user is shrinking as more users are shifting to discounted student or family plans. The push into new countries where lower subscription prices are required is also weighing on the average amount being collected per premium member.
Both companies are struggling on the bottom line. Spotify was bragging earlier this month about posting its first period of positive operating income in the fourth quarter, but its guidance calls for deficits to return in the first quarter and for all of 2019. iQiyi continues to post steep losses. Analysts don't see Spotify and iQiyi turning an annual profit until 2021 and 2022, respectively.
Spotify is the larger of the two companies. It cranked out $1.7 billion in revenue for the fourth quarter, reaching 207 million monthly active users. iQiyi landed just above $1 billion on the top line, as it may have a larger total audience but the majority of them remain ad-accepting free users.
Growth is expected to decelerate for both companies. The midpoint of Spotify's revenue growth range for the current quarter is 27.5%, slowing to 23.5% for all of 2019. iQiyi is eyeing 40% to 46% in top-line gains for the current quarter, and it isn't offering up a full-year outlook.
There's no point in valuing the companies based on earnings given the lack of consistent profitability, and they trade at comparable price-to-sales multiples. Spotify and iQiyi command enterprise values that are 4.3 and 5.1 times their trailing top-line returns over the past four quarters, respectively. The nod here has to go to iQiyi. There are certainly regulatory risks in China, but Spotify is butting heads with feisty rival platforms. They can both beat the market in the year ahead, but iQiyi's much higher growth makes it the better bet for investors here.