The trade war, the economic slowdown in China, and the depreciation of the yuan caused many investors to flee Chinese tech stocks over the past year. Yet some of those stocks weathered the downturn much better than others.
Momo (MOMO 0.17%) stock, which owns two major dating apps in China, has rallied nearly 50% this year. Baidu (BIDU 1.02%), meanwhile, which owns the country's top search engine, has shed nearly 30% of its stock's value. Let's see why Momo surged and Baidu stumbled, and whether those trends will persist through the end of the year.
Image source: Getty Images.
How do Momo and Baidu make money?
Momo's namesake app lets users find each other based on their personal profiles and locations. Last year it acquired Tantan, a Chinese clone of Tinder. Both apps are widely used for online dating. Momo generates most of its revenue from its namesake app's live video platform, which lets viewers buy virtual gifts for their favorite broadcasters. Momo and Tantan also generate revenue from premium subscriptions, which unlock more dating features.
Baidu generates most of its revenue from online ads. The rest of its revenue comes from other businesses like the streaming video platform iQiyi (IQ 6.26%), which it spun off last year but retained a majority stake in, and cloud services. Baidu also recently divested several businesses, including its financial services unit, food delivery investments, and global ad and tools business, to focus on newer markets like AI assistants, smart speakers, and driverless cars.
Which company is growing faster?
Momo and Baidu both experienced decelerating sales growth over the past year:
|
YOY revenue growth |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 |
Q1 2019 |
|---|---|---|---|---|---|
|
Momo |
64% |
58% |
51% |
50% |
35% |
|
Baidu |
31% |
32% |
27% |
22% |
15% |
YOY = Year-over-year. Source: Company quarterly reports.
Momo's growth from the second quarter of 2018 onwards was buoyed by its takeover of Tantan. However, three severe headwinds throttled its growth in the first quarter of 2019: Chinese regulators ordered the removal of Tantan from Chinese app stores, Apple suspended in-app payments for Tantan, and the company voluntarily suspended news feed posts on Momo and Tantan pending an internal review.
Regulators were reportedly concerned about pornographic ads and the use of Momo's apps for prostitution. But Momo didn't discontinue its app for existing users, and it still grew its monthly active users (MAUs) 11% annually to 114.4 million during the first quarter. Momo also expects its revenue to rise 27%-30% annually during the second quarter, based on a "conservative" scenario that factors in app store bans throughout the entire quarter.
Image source: Getty Images.
Baidu's growth decelerated as the decelerating Chinese economy took a bite out of its online ad sales, which grew just 3% annually in the first quarter. Competition from other ad platforms, like Tencent's WeChat, exacerbated the pain.
Baidu offset the slowdown in its ad business with higher revenues from iQiyi, but that was more of a curse than a blessing since the streaming platform remains deeply unprofitable. Baidu also highlighted the growth of its Mini Programs for its mobile app, the expansion of its Alexa-like DuerOS voice assistant, and its progress in new markets like driverless cars -- but none of those efforts significantly boosted its top line growth. Baidu expects roughly flat revenue growth in the second quarter.
Looking ahead, analysts expect Momo's revenue to rise 27% this year, and for Baidu's revenue to rise just 3%.
Which company is more profitable?
Momo reported an adjusted operating margin (which excludes Tantan's impact) of 32% last quarter, which remained unchanged from a year earlier. Baidu's adjusted operating margin came in at just 2% last quarter, compared to 26% a year earlier.
Baidu's operating margin plunged for four main reasons: Its revenue growth dried up, a higher percentage of its revenue came from the unprofitable iQiyi segment, it significantly increased its spending on TV ads during CCTV's Chinese New Year special, and it spent more money on next-gen bets like AI, speakers, and driverless cars.
Momo's net income fell 65% annually to 289.3 million RMB ($43 million) last quarter, mainly due to the acquisition of Tantan. But on an adjusted basis, which excludes those costs and other one-time charges, its net income rose 1% annually to 910.3 million RMB ($136 million).
Baidu, however, posted a net loss of 327 million RMB ($49 million) last quarter, marking its first unprofitable quarter since its IPO. On an adjusted basis, which excludes its divestments, acquisitions, and other charges, its net income still plunged 80% to 967 million RMB ($144 million).
Neither company offered concrete earnings guidance, but analysts expect Momo's adjusted earnings to improve 24% this year as Baidu's earnings tumble a whopping 57%.
The obvious winner: Momo
Momo trades at just 10 times forward earnings, which makes it look cheap relative to its earnings growth potential. Baidu has a higher forward P/E of 17, which looks far less tempting when we consider its near-term challenges.
Momo is clearly a better buy than Baidu at these levels. It still faces unresolved regulatory issues, but it has better growth, higher margins, and a wider moat, and isn't as vulnerable to economic headwinds as Baidu's core advertising business.
