Better Buy: iQiyi vs. Huya

iQiyi (NASDAQ:IQ) and Huya (NYSE:HUYA) are two of China’s most well-known video platforms. iQiyi is a top premium platform for TV shows and movies, and Huya is a leading platform for streaming video games.

Both companies are also subsidiaries of much larger companies. iQiyi belongs to Baidu (NASDAQ:BIDU), which still retains control over the company after spinning it out in an IPO in 2018. Huya belongs to Tencent (OTC:TCEHY), which bought out JOYY‘s (NASDAQ:YY) stake in the company earlier this year. Tencent also owns a stake in Huya’s top rival, Douyu (NASDAQ:DOYU), and it’s currently in the process of merging the two companies under Huya’s banner.

A young woman plays a PC game.

Image source: Getty Images.

iQiyi’s stock has risen about 25% above its IPO price. But Huya, which went public just two months after iQiyi, trades nearly 75% above its IPO price. Let’s see why Huya outperformed iQiyi, and whether or not that trend will continue in the future.

How do iQiyi and Huya make money?

iQiyi operates a freemium platform. Free users can watch a limited library of ad-supported videos, while paid subscribers gain ad-free videos and additional content. Last quarter, iQiyi generated 56% of its revenue from paid subscriptions, 25% from ads, and the rest from other businesses — including content licensing fees from other broadcast platforms.

Huya also operates a freemium platform. It sells ads across its platform, but it generates most of its revenue from virtual gifts viewers can buy for their favorite broadcasters. Last quarter, Huya generated 94% of its revenue from its live streaming business, and the remaining 6% from online ads.

Which company is growing faster?

Huya’s revenue has risen at a much faster rate than iQiyi’s over the past year, but its growth has been decelerating:

Revenue Growth (YOY)

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

iQiyi

7%

7%

9%

4%

(3%)

Huya

77%

64%

48%

34%

24%

YOY -Year-over-year. Source: Company quarterly reports.

iQiyi’s total number of subscribers dipped 1% year-over-year to 104.8 million last quarter. The company blamed that decline on a shortage of new content, partly due to the COVID-19 crisis, as well as users spending more time on short video apps like ByteDance’s Douyin and a shorter summer vacation this year.

CEO Yu Gong predicted the slowdown would be “temporary”, but pressure from its two top rivals, Tencent Video and Alibaba‘s (NYSE:BABA) Youku Tudou, could continue to throttle its growth in paid members.

Huya’s monthly active users (MAUs) rose 18% year-over-year to 172.9 million last quarter. Within that total, its mobile MAUs grew 16% to 74.2 million, and its total number of paid users increased 13% to 5.3 million.

CEO Rongjie Dong attributed that growth to an increase in e-sports tournaments throughout the shorter summer and its deeper ties with Tencent, the world’s largest video game publisher. If Huya closes its planned merger with Douyu next year, its MAUs could more than double to nearly 370 million, with over 13 million paid users.

Profitability and valuations

iQiyi isn’t profitable, but its net losses have narrowed year-over-year for two consecutive quarters. Huya is firmly profitable, and its net income more than doubled year-over-year last quarter. On an adjusted basis, Huya’s net income rose 75%.

A young man plays a PC game.

Image source: Getty Images.

It’s difficult for iQiyi to break even, for two reasons. First, it costs a lot of money to license content or create new shows and movies. Second, intense competition from Tencent Video, Youku Tudou, and other video platforms ultimately limits its ability to raise prices.

Huya generates higher profits because it shares a near-duopoly with Douyu, is backed by Tencent’s massive video game business, and generates most of its revenue from higher-margin virtual gifts instead of lower-margin digital ads.

Analysts expect iQiyi’s revenue to rise 10% this year and 13% next year, with narrower losses over the next two years. Based on those estimates, iQiyi trades at three times next year’s sales.

Wall Street expects Huya’s revenue and earnings to rise 40% and 74%, respectively, this year. Next year, analysts expect its revenue and earnings to rise 23% and 36%, respectively. Based on those estimates, Huya looks incredibly cheap at 19 times forward earnings and just two times next year’s sales.

Those forecasts don’t account for Huya’s potential merger with Douyu, which could easily double its annual revenue. But its valuation should remain roughly the same after the all-stock merger, since it will grant current shareholders of Huya and Douyu equal halves of the new company.

The obvious winner: Huya

It’s not much of a contest between iQiyi and Huya. Huya generates stronger growth in users, revenue, and profits, and it will dominate China’s booming e-sports market after it merges with Douyu. It’s also trading at lower valuations than iQiyi.

iQiyi won’t fade away anytime soon, but it’s unprofitable and bleeding subscribers. Until those metrics start moving in the right direction again, it will remain a much weaker streaming video play than Huya.

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