iQiyi (NASDAQ:IQ) and Match Group (NASDAQ:MTCH) operate in different countries and industries, but have attracted some of the same investors. iQiyi owns one of the largest streaming video platforms in China, while Match owns Tinder and other popular dating apps and is based in the U.S. I compared these two stocks twice last year, once in April and again in August.
I declared Match the better buy both times, since it generated stronger revenue growth, was firmly profitable, and led its core market. iQiyi's growth was decelerating, it remained unprofitable, and it faced tough competition from Tencent Video and Alibaba's Youku Tudou in China's streaming video market.
The market agreed with me. iQiyi's stock slipped more than 20% over the past 12 months as Match's stock more than doubled. But as investors should know, past performance never guarantees what's going to happen in the future. So let's examine both stocks to see if Match is still the better buy.
What happened to iQiyi?
When Baidu spun off iQiyi in an IPO in early 2018, many analysts called the newly independent company the "Netflix of China," but there are differences. iQiyi operates a freemium platform, which offers some free content with ad-free streams and additional content for paid subscribers. Netflix doesn't offer a free, ad-supported tier.
iQiyi's subscriber base shrank sequentially in the second, third, and fourth quarters of last year and its number of paid subscribers declined 5% to 101.7 million at the end of 2020. iQiyi attributed the slowdown to a shortage of fresh content during the pandemic, but competition from Tencent Video and Youku Tudou, the popularity of short video apps such as ByteDance's Douyin (also known as TikTok overseas), and the growth of Gen Z-oriented media platforms such as Bilibili likely exacerbated the situation.
iQiyi's revenue still rose 2% to 29.7 billion yuan ($4.6 billion) for the full year, but most of that growth occurred in the first half of the year as stay-at-home measures buoyed demand for streaming media services. Its net loss narrowed from 10.3 billion yuan to 7.0 billion yuan ($1.1 billion), but its bottom line should remain in the red for the foreseeable future.
iQiyi claims it can win back subscribers with fresh content as studios start producing new TV shows and movies after the pandemic, but it still expects its revenue to decline 2%-8% year over year in the first quarter of 2021. Analysts expect its revenue to rise 10% with a narrower loss this year, but it's still drowning in debt, with a whopping debt-to-equity ratio of 4.1. The company is expected to report first-quarter numbers in mid-May.
How did Match fare during the pandemic?
Match's top app is Tinder, but it also owns other popular apps, including Hinge, Meetic, Pairs, BLK, Chispa, and Plenty of Fish. Its total number of subscribers across all its apps rose 12% to 10.9 million at the end of 2020.
Match's revenue rose 17% to $2.4 billion for the full year. Within that total, its direct revenue from Tinder rose 18% to $1.4 billion. Match's user growth remained stable throughout the pandemic because people still used them as social platforms even if in-person dates were curtailed.
Its operating margin held steady year over year at 31%, and its earnings from continuing operations grew 33% to $484 million. Its adjusted EBITDA also increased 15% to $897 million.
Match's debt-to-equity ratio was temporarily distorted by IAC/InterActiveCorp's divestment of its equity stake in the company last year, but its debt is still more manageable than iQiyi's.
Match didn't provide any guidance last quarter, but analysts expect its revenue to rise 19% this year as its total earnings per share (including the impact of IAC's divestment) more than quadruple against an easy year-over-year comparison.
Match should continue growing after the pandemic ends, as online dates shift back to the real world again. Its new "Tinder Platinum" tier, which provides even more perks than its Gold tier, could also boost its average revenue per user (ARPU), but it's only rolled out the feature in select markets.
Match expects to accelerate that rollout after the pandemic passes, but it doesn't expect the revenue boost to be "anywhere close" to its Gold upgrades in 2017 and 2018. Nonetheless, Match still expects its growth to accelerate across both its Tinder and non-Tinder brands this year.
Match still faces a lot of competitors in the online dating market, such as Bumble, which lets women make the first move, and Facebook Dating, which is offered as a free feature for Facebook users. However, Match's portfolio is well diversified across a wide range of demographics, and it can offset the slower growth of its less popular apps with higher-growth ones.
The valuations and verdict
iQiyi's stock might look cheap at just over two times this year's sales, and it's trading below its IPO price of $18. But it's cheap because its growth has peaked and it lacks a viable path toward profitability.
Match's stock isn't cheap at 52 times forward, estimated earnings and 14 times this year's sales. But it should remain the market leader in online dating for the foreseeable future, and its business is naturally insulated from macro headwinds.
So once again, the choice is simple -- I'd much rather pay a slight premium for Match's long-term growth potential than buy iQiyi at deep discount.