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Better Buy: iQiyi vs. Spotify

By Leo Sun – Jun 11, 2020 at 8:45AM

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Which streaming media giant is the better long-term investment?

iQiyi (IQ -2.17%) and Spotify (SPOT -0.62%) are two of the biggest streaming media companies in the world. iQiyi, which was spun off from Chinese search giant Baidu in an IPO in 2018, is one of China's top video streaming services. Spotify, which went public via a direct listing the same year, serves the largest base of paid streaming music subscribers in the world.

iQiyi went public at $18 per share, but the stock still hovers around its IPO price due to concerns about its slowing growth, lack of profits, macro headwinds in China, and allegations of fraud. Spotify fared better, advancing about 45% from its initial reference price of $132, as it continued growing amid escalating competition from tech giants like Apple (AAPL -3.00%) and Amazon (AMZN -1.57%).

Will Spotify continue outperforming iQiyi throughout the rest of 2020? Let's dig deeper to find out.

A young woman listens to music on her smartphone.

Image source: Getty Images.

How fast is iQiyi growing?

iQiyi's total number of subscribers grew 23% annually to 118.9 million last quarter. Of those subscribers, 99.2% were on paid plans, while the remaining sliver consisted of free trial users.

iQiyi offers free trials via partnerships with Xiaomi, which pre-installs its app on its set-top boxes; JD.com, which bundles iQiyi with its Amazon Prime-like JD Plus memberships; and other companies.

iQiyi's total revenue rose 9% annually to 7.6 billion yuan ($1.1 billion) last quarter, as its double-digit growth in membership and content distribution revenue barely offset declines in its advertising business, which was struck by COVID-19 headwinds, and its other smaller businesses.

On the bottom line, iQiyi's net loss widened from 1.8 billion yuan to 2.9 billion yuan ($406 million), mainly due to high content acquisition costs and weak ad sales. It expects its revenue to rise just 2%-8% annually in the second quarter. Wall Street expects its revenue to grow 12% this year, and for its earnings to remain deep in the red.

How fast is Spotify growing?

Spotify's total number of monthly active users (MAUs) grew 31% annually to 286 million last quarter. Its number of ad-supported MAUs rose 32% to 163 million, while its number of premium subscribers rose 31% to 130 million.

A woman listens to music on headphones.

Image source: Getty Images.

Spotify's total revenue rose 22% annually to 1.85 billion euros ($2.1 billion) as its premium subscription and ad revenues grew 23% and 17%, respectively. Its operating loss narrowed from 47 million euros to 17 million euros ($19.3 million), as lower operating expenses throughout the COVID-19 crisis partly offset its high content acquisition costs.

On the bottom line, Spotify eked out a net profit of 1 million euros ($1.1 million), versus a net loss of 142 million euros a year earlier, but that was mainly attributed to a one-time tax benefit of 40 million euros.

Spotify expects its revenue to rise 5%-17% annually in the second quarter and 13%-19% for the full year. However, it still expects its operating losses to widen (at the midpoints of its estimates) for both periods -- so it will likely remain unprofitable for the foreseeable future.

The tailwinds and headwinds

iQiyi and Spotify will both benefit from the growth of the streaming market as consumers pivot away from cumbersome digital downloads.

However, iQiyi still faces intense competition from rivals like Tencent Video and Alibaba's Youku Tudou, as well as allegations of inflated sales figures from prolific short sellers Wolfpack Research and Muddy Waters. Like other Chinese stocks, it also faces the threat of being delisted by a new U.S. Senate bill aimed at auditing Chinese companies.

Spotify also faces tough competition from Apple Music, which Counterpoint Research claims has 68 million subscribers, and Amazon Music, which surpassed 55 million subscribers earlier this year. Apple and Amazon both tether their music platforms to their broader ecosystems, and both tech giants are likely willing to take losses on their streaming services to gain bigger shares of the crowded market.

The winner: Spotify

iQiyi and Spotify are both top streaming stocks, but Spotify is clearly the better bet at these prices. Spotify generates stronger revenue growth, its losses aren't as steep as iQiyi's, and it doesn't face troubling allegations from short sellers or delisting threats.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, Apple, Baidu, JD.com, and Tencent Holdings. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Amazon, Apple, Baidu, JD.com, Spotify Technology, and Tencent Holdings. The Motley Fool recommends iQiyi and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

iQIYI, Inc. Stock Quote
iQIYI, Inc.
IQ
$2.71 (-2.17%) $0.06
Spotify Stock Quote
Spotify
SPOT
$86.30 (-0.62%) $0.54
Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.20 (-3.00%) $-4.28
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$113.00 (-1.57%) $-1.80

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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