Huya (NYSE:HUYA) was widely promoted as the "Twitch of China" when it went public last year. That comparison made sense, since Huya was also a market-leading video game streaming platform that would profit from the growth of the esports market.
However, investors might have missed a key difference between Amazon's (NASDAQ:AMZN) Twitch and Huya. Twitch is the leader in its core U.S. market by a wide margin, but Huya is the second-largest streaming platform in China after Douyu -- which recently filed for an IPO in the U.S.
This puts Huya in an awkward spot, since it's often wiser to invest in the market leader instead of a smaller rival. Tencent (OTC:TCEHY), one of Huya's biggest backers, also owns a major stake in Douyu. Should Huya investors consider switching teams when Douyu goes public?
Comparing the key growth metrics
Huya's monthly active users (MAUs) rose 35% annually to 116.6 million last quarter. Douyu's MAUs increased 14% to 153.5 million. Huya's number of paying users rose 73% annually to 4.8 million during the fourth quarter, while Douyu's paid users grew 17% to 4.2 million.
Douyu also provided its user growth figures for the first quarter of 2019. Its MAUs rose 26% annually to 159.2 million, and its paying users climbed 67% to 6 million. Investors won't know if Huya can match those growth rates until it reports its first-quarter earnings.
But during last quarter's conference call, Huya CEO Rongjie Dong claimed that its platform was the "No. 1 game live streaming platform in China" in terms of total MAUs, mobile MAUs, and average time spent on the app (without citing any specific studies). That was an odd claim, since Douyu clearly has more MAUs. However, Dong might only have been counting viewers of live gaming videos -- since Douyu also hosts nongaming videos.
Looking back at its IPO filing, Huya seems to base its market-share claims on a self-commissioned study from Frost & Sullivan, a firm that previously provided questionable market-share claims for Chinese companies (like Secoo and Sea Limited) in reports prior to their IPOs. Douyu doesn't cite any data from Frost & Sullivan in its prospectus.
Which company is more profitable?
Huya and Douyu both generate the majority of their revenues through sales of virtual items, which viewers buy for their favorite broadcasters. Some 95% of Huya's revenue came from virtual gift sales in the fourth quarter, compared with 86% of Douyu's revenue in the same quarter. Most of the remaining revenue for both companies came from online ads.
Both companies boast impressive revenue growth rates. Huya's surged 113% to $678.3 million in 2018, while Douyu's rose 94% to $531.5 million. However, neither company is profitable yet, due to high infrastructure and content acquisition costs like revenue-sharing deals with top broadcasters. Huya posted a net loss of $281.8 million last year, while Douyu posted a net loss of $127.4 million.
Those losses should continue for the foreseeable future. Huya recently raised $327 million in a secondary offering for additional R&D investments, and Douyu could be headed down the same path.
Similar tailwinds and headwinds
Huya's and Douyu's impressive growth in MAUs, paid users, and revenues reflects the strength of the live streaming and gaming industries in China. However, both markets are highly vulnerable to government crackdowns.
Chinese regulators clamped down on live streaming platforms over the past two years due to censorship issues, and the gaming industry is still recovering from a nine-month freeze on new video game approvals. The Chinese government also banned Twitch last year, presumably due to censorship concerns.
Huya and Douyu also aren't the only players in the video game streaming market. Bilibili (NASDAQ:BILI) -- another Tencent-backed platform that offers streaming videos, online comics, and games to 92.8 million MAUs and 4.4 million paying users -- is tremendously popular with China's Gen Z customers.
Should Huya investors be concerned?
Douyu reportedly wants to raise $500 million in its IPO, but its valuation won't be revealed until it prices the offering. The company was valued at $2.4 billion in its last funding round in March, compared with Huya's current market cap of $4.9 billion.
Huya currently trades at five times this year's sales, which is a pretty low ratio relative to its expected revenue growth rate of 54% this year. If Douyu launches at a similar valuation, it might be a better play than Huya, since it has more users, stronger sales growth, and narrower losses.