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Better Buy: Momo vs. iQiyi

By Rick Munarriz – Feb 27, 2020 at 10:25AM

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Streaming video is at the heart of two Chinese growth stocks, but the investments have been going in different directions lately.

It's probably not a surprise to see investors steering clear of Chinese growth stocks. The country's economy was already slowing before the coronavirus fears started to mount. But this recent pullback could be an opportunity to pick up quality names at a discount. 

Momo (MOMO -5.53%) and iQiyi (IQ -4.15%) investors have seen better days. The two companies cashing in on China's appetite for streaming video have seen their shares decline over the past year, though at least iQiyi is trading positive in 2020. They may not be household names for stateside consumers -- and they aren't growing as quickly as they once did -- but they operate unique and attractive online businesses in the world's most populous nation. Let's size them up to see which one is the better fit in a stock portfolio.

Momo app running on a smartphone.

Image source: Momo.

Coming soon

Both stocks have a lot to prove in the coming days. iQiyi reports its fourth-quarter results shortly after Thursday's market close. It was originally slated to post its latest financials earlier this month, only to push the report out as a result of coronavirus fears. Momo has historically served up its fourth-quarter numbers in early March.

We will have to look back to the third quarter to get the latest read on iQiyi and Momo, even if that seems like a lifetime ago given all that has happened in terms of easing trade tensions and rising health concerns in recent months.

Once you overcome the hurdle of decelerating growth, you may come to appreciate what iQiyi and Momo bring to the table. iQiyi is the country's leading provider of streaming video programming. It has historically been a hotbed of free ad-supported videos, but like so many platforms, it's doing a good job of getting folks to pay for subscriptions by featuring exclusive content and enhanced features. The number of premium members at iQiyi had risen 31% over the past year to hit 105.8 million as of the end of September. 

Revenue hasn't kept up the pace at iQiyi, largely because of double-digit percentage declines in advertising as well as content distribution revenue. Top-line growth has decelerated in all but one quarter over the past two years, and the 7% year-over-year increase in revenue in its latest report doesn't exactly exude confidence. However, since premium subscriptions are a steadier revenue source than online advertising, it's better to see that part of its business holding up better than the cyclical online ad segment.  

Momo leans on live streaming video for its online dating and social discovery platforms. It has also seen its sequential top-line gains decelerate in all but one report over the past two years, but the 22% gain it posted in the third quarter is roughly three times better than iQiyi's last report. 

There are 114.4 million monthly active users on Momo, a figure that is marginally ahead of the 110.5 million it was reaching a year earlier. Premium users -- a big number to watch for both iQiyi and Momo -- have risen 7% to 13.4 million over the past year.

It may seem as if iQiyi is growing its base of premiums users more effectively than Momo, but the latter is the one milking more revenue out of folks willing to spend money on the platform. Momo's value-added services segment -- basically virtual gifting on Momo as well as membership subscriptions -- has soared 86% over the past year. 

Both companies are strong players in their respective markets. I tapped Momo as the better buy when I pitted the two companies against each other a little more than five months ago. Momo is very profitable. Analysts see iQiyi posting losses until 2022. Momo was -- and continues to be -- growing faster than iQiyi. It's also surprisingly cheap with a trailing earnings multiple in the teens. It seemed like an easy call at the time, but I was wrong.

iQiyi has gone on to soar 47% in those five months, compared to a 17% slide at Momo. The growth and valuation arguments continue to favor Momo, and those cases have gotten even louder given the divergent ways of the two stocks. However, understanding why investors are flocking to iQiyi is important in assessing why I'm going with the momentum and siding with iQiyi here.

The coronavirus outbreak has taken a toll on China. The cancellation of festivals and other social events -- as well as the closure of factories and in some cases even schools -- are reinforcing iQiyi's model. Folks in China need entertainment at home more than ever, and iQiyi is a clear beneficiary. The climate for dating isn't as kind, even if online dating, flirting, and gifting are probably holding up better than conventional means for making introductions.

Investing in Chinese stocks is even riskier than it was before, and until the coast is clear on the coronavirus front, investors will be shifting their growth-stock allocations toward iQiyi. 

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends iQiyi and Momo. The Motley Fool has a disclosure policy.

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Stocks Mentioned

MOMO Stock Quote
MOMO
MOMO
$4.61 (-5.53%) $0.27
iQIYI, Inc. Stock Quote
iQIYI, Inc.
IQ
$2.77 (-4.15%) $0.12

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