iQiyi (NASDAQ:IQ) and Huya (NYSE:HUYA), two major players in China's streaming video market, went public last year. iQiyi went public last March at $18. Its stock surged to nearly $30 earlier this year, but subsequently dropped back to its IPO price.
Huya went public at $12 last May. It also hit nearly $30 earlier this year before giving up a large portion of those gains. But unlike iQiyi, Huya remains comfortably above its IPO price in the low $20s. The sluggish Chinese economy and the trade war seemingly kept investors away from both stocks, but could one rebound more quickly than the other?
Understanding iQiyi and Huya's businesses
Both iQiyi and Tencent Video run on a freemium model, in which viewers watch a limited amount of ad-supported content or pay subscriptions for ad-free and exclusive programs. iQiyi generates most of its revenue from subscriptions, with smaller portions coming from ads, content distribution, and other (mainly gaming) businesses.
Huya is often called the "Twitch of China" because video games and esports dominate its live video broadcasts. Its main rival is DouYu (NASDAQ:DOYU), which went public this July.
Huya generates most of its revenue from sales of virtual gifts and items, which viewers can buy as "tips" for their favorite broadcasters. It generates a smaller percentage of its revenue from ads.
How fast are iQiyi and Huya growing?
iQiyi's total number of subscribers rose 31% annually to 105.8 million last quarter. Within that total, 99.2% were paying monthly fees (instead of using free trials).
However, iQiyi's total revenue grew just 7% annually to 7.4 billion yuan ($1.0 billion) during the quarter, as a 14% decline in ad revenue and an 18% drop in content distribution revenue offset its 30% growth in membership revenue.
iQiyi attributed its declining ad revenue to "challenging" macro issues in China, delayed launches for certain programs, and "intensified competition" in in-feed digital ads. Some of that competition likely came from aggressive rivals like ByteDance and Tencent.
iQiyi expects that slowdown to continue with just 1% annual revenue growth (at the midpoint) for the fourth quarter. Analysts expect its revenue to rise just 9% for the full year, compared to 52% growth in 2018.
Huya's total MAUs (monthly active users) grew 48% annually to 146.1 milion last quarter. Its mobile MAUs grew 29% to 63.8 million, and its total paying users climbed 29% to 5.3 million.
Its total revenue surged 77% annually to 2.3 billion yuan ($317 million). Its live streaming revenue, which accounted for 95% of its top line, rose 77%. Its advertising and other revenue, which accounted for the remaining 5% of its top line, also soared 81%.
Huya's growth is decelerating, but it still expects its fourth-quarter revenue to rise 58% annually at the midpoint. Wall Street anticipates 71% revenue growth for the full year, compared to 113% growth in 2018.
Which company is more profitable?
iQiyi remains deeply unprofitable, even though Baidu still covers some of its content acquisition costs. Its operating loss widened year-over-year from 2.6 billion yuan to 2.8 billion yuan ($396 million) last quarter, and its net loss widened from 3.1 billion yuan to 3.7 billion yuan (approximately $516 million).
iQiyi doesn't have much room to raise its monthly subscription fee (which is only about $30 a year) due to intense competition from Tencent Video and other platforms. Its costs for licensing content and producing original content are also climbing, which indicates that it won't achieve profitability anytime soon.
Huya's content costs are considerably lower, since it mainly relies on revenue-sharing arrangements with individual broadcasters. It faces competition from DouYu and other live-streaming platforms, but it still enjoys a first mover's advantage in the game streaming space.
As a result, Huya is now consistently profitable. Its net income surged 117% to 123.2 million yuan ($17.2 million) last quarter. On a non-GAAP basis, which excludes stock-based compensation expenses, its net income rose 71% to 206.4 million yuan ($28.9 million). Analysts expect its earnings to grow 50% this year -- which is a stellar growth rate for a stock that trades at 28 times forward earnings.
The clear-cut winner: Huya
iQiyi and Huya will remain market leaders in China's video streaming market, but Huya is clearly the stronger investment right now.
Huya generates stronger revenue and earnings growth and faces fewer competitive headwinds, and the stock is cheap relative to its growth. Its growth is decelerating and investors should keep an eye on DouYu, but it clearly has a more sustainable business model than iQiyi.