China's gaming market could grow at a CAGR (compound annual growth rate) of 14% from 2019 to 2024, according to Research and Markets. The research firm notes that esports will be "one of the important drivers of growth" for the industry.

Two companies dominate China's esports market: Huya (NYSE:HUYA) and DouYu International (NASDAQ:DOYU). Huya, a spin-off of the streaming video company YY (NASDAQ:YY), went public last May. DouYu followed suit with its IPO this April.

Blocks of arrows heading up and down.

Image source: Getty Images.

Huya's stock currently trades more than 50% above its IPO price of $12 per share, but DouYu's plunged nearly 40% from its IPO price of $11.50 per share. Let's see why investors were bullish on the former and bearish on the latter, and whether or not those trends will continue.

Meet the "Twitches of China"

Huya and DouYu are both frequently compared to Amazon's Twitch, the top game streaming platform in America. Tencent, the largest gaming company in the world, owns stakes in both Huya and DouYu.

Huya mainly hosts live video game streams and other esports content. Its monthly active users (MAUs) grew 48% annually to 146.1 million last quarter. Within that total, its mobile MAUs grew 29% to 63.8 million, and its total paying users rose 29% to 5.3 million.

Huya generated 95% of its revenue from sales of virtual gifts and items on its live streaming platform during the quarter. Viewers purchase these items for their favorite broadcasters, who receive a cut of the revenue. 5% of its revenue came from digital ads.

A gamer plays a PC game.

Image source: Getty Images.

DouYu's total MAUs grew 15% annually to 163.6 million last quarter. DouYu has a larger overall audience than Huya, but it offers a wider range of video content beyond esports. Esports viewers only accounted for 62% of its MAUs at the end of 2018.

DouYu's audience is growing at a slower rate than Huya's, and it has fewer paid and mobile users. Its mobile MAUs rose 26% to 52.1 million last quarter, while its paying user base grew 66% to 4.2 million. DouYu also generates more revenue from ads than Huya: Its live streaming unit generated 89% of its revenue last quarter, while the remaining 11% came from ads.

Which company is growing faster?

Huya and DouYu both generated robust revenue growth last quarter, but DouYu is still growing at a slightly faster clip.

YOY revenue growth

Live streaming (Q3 2019)

Advertising (Q3 2019)

Total (Q3 2019)

Q4 2019 forecast*

Huya

77%

81%

77%

58%

DouYu

83%

69%

81%

72%

YOY = Year-over-year. Source: Company quarterly reports. *Midpoint.

Analysts expect Huya's revenue to grow 71% this year but decelerate to 37% growth next year. Likewise, they expect DouYu's revenue to rise 98% this year but also slow to 38% growth in 2020.

Huya is profitable and DouYu isn't, but both companies' bottom lines are improving. On a GAAP basis, Huya's net income soared 117% to 132 million yuan ($17 million) in the third quarter. On a non-GAAP basis, which excludes share-based compensation expenses, its net income grew 71% to 206 million yuan ($29 million).

Analysts expect Huya's adjusted earnings to grow 47% this year and 80% next year -- which are stunning growth rates for a stock that trades at 24 times forward earnings.

Meanwhile, DouYu's GAAP loss narrowed from 220.5 million yuan to 165 million yuan ($23 million) last quarter. On a non-GAAP basis, it posted a profit of 72 million yuan ($10 million), compared to loss of 214 million yuan a year earlier.

Wall Street expects DouYu's non-GAAP profit to roughly triple next year -- which is also a high growth rate for a stock that trades at 17 times forward earnings.

Which stock should you buy?

Huya and DouYu should both benefit from the growth of China's esports market, and both stocks look cheap relative to their growth. However, Huya's stronger growth in MAUs, its larger base of mobile and paid users, its streamlined focus on esports, and its GAAP profitability all make it a more appealing investment than DouYu.