The greatest increase in entertainment and media spending worldwide over the next four years is estimated to take place in China, according to PwC. So today, we're comparing the investment case between two leaders of China's booming digital media landscape. If you're looking for a growth stock to spice up your returns, iQiyi (IQ -2.77%) or Huya (HUYA 2.98%) might be the stock you're looking for.
Both stocks have taken a hit over the last month related to the COVID-19 outbreak, but as with previous crises over the last century, this too shall pass. Investors who keep buying stocks and remaining patient will be that much better off in 10 years.
Let's see which of these Chinese growth stocks is the better buy today.
iQiyi: A leader in streaming entertainment
iQiyi is often referred to as the "Netflix of China." It is one of two dominant video streaming providers in China, sharing roughly an equal share of the market with rival Tencent (TCEHY 0.03%) Video. iQiyi is backed by leading Chinese search giant Baidu and had its initial public offering (IPO) in 2018.
The company monetizes its video streaming service with both a paid subscription offering and an ad-supported option. About half of iQiyi's $1.1 billion in revenue in the fourth quarter came from paid memberships. Membership services revenue increased 21% year over year, which management credited to its growing library of premium content.
However, a soft Chinese economy caused advertising revenue to drop 15% last quarter. This weighed on total revenue growth, which increased just 7% across the company.
To diversify away from China, iQiyi is looking to expand to Southeast Asia. It also has a content distribution business, which grew 68% year over year last quarter. But other revenue, including online games and live broadcasting, saw a decrease of 21%.
For the first quarter of 2020, management is calling for revenue to increase between 2% to 8% year over year, reaching a level of $1.02 billion to $1.08 billion.
Huya: The leader in esports and live game streaming in China
Huya is the leading live game streaming platform in the largest video game market in the world. Its streaming platform is popular for broadcasting esports events, and China is on pace to surpass South Korea to become the second-largest esports market in the world behind the U.S.
Esports is an emerging channel of growth in the video game industry, and Huya is an excellent stock to consider to ride that trend.
Huya was started in 2014 by YY and was spun off as a separate company in 2018. Early that year, Tencent acquired a sizable stake in the shares, with rights to acquire a 50.1% voting interest in the company between March 8, 2020, and March 8, 2021.
A key factor of Huya's success is that it has strong relationships with leading game makers like Tencent's Riot Games, developer of the most-watched esports title in the world, League of Legends. Huya also is starting to publish games by third-party developers, such as Remedy's Control (2019).
Unlike iQiyi, Huya is not dependent on a healthy ad-spending environment to grow revenue. Ad revenue made up only 4.7% of its business in the most recent quarter. Most of Huya's revenue is generated from paying users purchasing virtual gifts to support their favorite streaming personalities. Live streaming revenue increased 77.2% year over year last quarter and comprised 95% of Huya's business.
Huya is growing much faster than iQiyi, with total revenue up 77.4% in the third quarter. It can likely maintain robust growth rates because of China's enormous gaming population. There were 687 million gamers in China in 2018 and that is expected to increase to 891 million by 2023.
Esports will continue to fuel Huya's growth. Competitive gaming is extremely popular in China, with the number of participants expected to grow at an annualized rate of 21.7% from 2015 through 2023. That is a massive tailwind for this growth stock. As of the third quarter, Huya had 146.1 million monthly active users, which grew 47.6% year over year.
Which is the better buy?
Growth is an important consideration when deciding which stock to buy. Huya is clearly the better of the two on that score.
Huya also wins on profitability. While iQiyi reported an operating loss of $1.3 billion over the last four quarters, Huya managed to show a small operating profit of $25.9 million. It's understandable for iQiyi to show losses, because it must invest heavily in new content to attract users and keep them engaged.
However, Huya's main costs are bandwidth costs to support its live streaming business and revenue sharing fees with the people who stream content. There are also some costs associated with esports content, but those are not nearly as costly for Huya as the movies and TV shows on iQiyi's video platform.
iQiyi is the slightly cheaper stock on a price-to-sales (P/S) basis, trading at 3.48 times trailing sales. Huya currently trades at 3.79 times sales, which is not much of a premium in exchange for much faster growth and better profitability.
Investors had previously awarded Huya stock a significantly higher P/S ratio than iQiyi. Eventually, the concerns about the economy in China will subside, and when that happens, Huya may return to that premium valuation.
Overall, Huya's faster revenue growth, superior profitability, and fast-growing user base make it a better growth stock to buy today.