Better Buy: iQiyi vs. Netflix

Entertainment giant Netflix (NFLX 1.74%) first started offering video streaming services in 2007. The company's decision to shift its focus away from its DVD rental business proved to be a shrewd one, and its revenue -- as well as its stock price -- soared as a result. However, in the years since it pioneered the model, many competitors have created streaming platforms of their own, among them, iQiyi (IQ), often described as "the Netflix of China."

Over the past 12 months, iQiyi's share price grew by 43%, an impressive performance compared to Netflix, shares of which increased by 19% over the period. But which of these two growth stocks is more likely to outperform the other moving forward?

Image Source: Getty Images.

Will Netflix survive the challenge from Disney+?

Last year was tough for Netflix as it had to deal with the hype, and the eventual launch, of two new video-streaming services: Disney's instant powerhouse Disney+, and Apple's potentially strong Apple TV+. The company's shares declined by more than 30% between July and September, in part due to investors' fears about how it would be impacted by the increasing competition. However, Netflix is showing signs that it can thrive regardless.

During the third quarter, Netflix's revenue grew by 31.1% year over year to $5.24 billion, while its earnings per share (EPS) increased by 65% to $1.47. It also added 6.8 million subscribers, and although that fell short of the company's own projection that it would add 7 million, it was still better than the 6.07 million subscribers added during the prior-year quarter, and significantly better than the 2.70 million subscribers added during the second quarter. In a recent SEC filing, Netflix disclosed that it's making most of its headway in international markets. Of the 6.8 million subscribers added during the third quarter, only 613,000 were added in North America. Netflix looks to continue its momentum overseas, most notably by adding more non-English original shows and movies to its library. It is also worth noting that about 80% of Disney+ subscribers also have Netflix subscriptions, so it largely isn't the case that customers are choosing one or the other.

iQiyi faces its own headwinds

iQiyi is one of the largest video-streaming platforms in China. However -- and despite its growth in terms of subscribers in recent years -- the company faces several challenges. First, the economic slowdown in China and the trade war between the U.S. and China aren't helping iQiyi. Second, the company faces strong competition in its domestic market. In particular, it has been in a battle with Tencent's Tencent Video. These factors have been sapping iQiyi's financial results of late, particularly in its online advertising business, which is its second-largest segment in terms of revenue.

During the third quarter, iQiyi's membership services revenue grew by 30% year over year as total subscriptions rose by 30%. But its online advertising revenue decreased by 14%. As a result, revenue for the quarter was $1 billion, a mediocre 7% year-over-year increase.  

iQiyi is looking to come out ahead of the competition by adding more original content to its library. In the third-quarter earnings press release, CEO Yu Gong had the following to say: 

Growing 30% year-over-year, our subscription business contributed more than half of our total quarterly revenues for the first time. This once again demonstrated the strength of our platform and validated our dedication to producing high quality original content.

Investing in original content isn't cheap, though, and although iQiyi is pursuing that goal with the help of Baidu (BIDU 0.72%) -- its majority shareholder -- investors should pay attention to the company's operating expenses, which increased by 7% during the third quarter. 

Comparing revenues and profitability 

Although Netflix's revenue grew faster than iQiyi's during the last two quarters, the dynamic was markedly different in prior quarters, as the table below shows. 

Revenue Growth (Year Over Year)

Data source: Quarterly filings for the companies shown.

However, while Netflix is already profitable, iQiyi is not. During the third quarter, iQiyi's operating loss was $396.2 million and its net loss was $516 million, slightly worse than the $457 million net loss recorded during the prior-year quarter. By contrast, Netflix recorded an operating income of $980 million and a net income of $665 million during the third quarter, up 65% year over year. 

The verdict

Though Netflix faces increasingly stiff competition, particularly in the U.S., in my view, it's a better investment option now than iQiyi. Netflix still has room to grow in international markets, and it's already profitable. By contrast, iQiyi is still crawling toward profitability, a destination that will be harder to reach given China's economic slowdown, competition from Tencent, and the higher expenses inherent in producing more original content. While iQiyi's revenue growth may pick up once again -- whereas Netflix's may be hindered due to competition from Disney+ -- Netflix's stock is likely to outperform iQiyi's in the long run.