China is not only the world's most populous country, it's the fastest-growing major economy and the second-largest overall. This economy has created many growth stocks, many of which have convenient comparable U.S. businesses. One such company is Momo (NASDAQ: MOMO), otherwise known as the "Match Group of China." Another is Huya (NYSE: HUYA), the "Twitch of China."
In trying to decide which stock is a better buy, we should acknowledge a couple of things at the outset. Certain headwinds and tailwinds apply equally to both companies and should, therefore, be discounted for the sake of comparison. In regard to headwinds, since both companies operate almost entirely in China, concerns about the impacts of the tariff war on the Chinese economy apply equally. Further, there are financial transparency concerns with any investment in China.
However, a reason to be bullish on many Chinese companies despite the aforementioned concerns is the incredible opportunity presented by the country's growing middle class. Research by the ChinaPower Project and McKinsey & Company suggests that there could soon be 550 million middle-class people in China -- more than the entire English-speaking populations of the U.S., Canada, Great Britain, and Australia combined. The growth of China's middle class means a growing amount of consumer discretionary spending is up for grabs.
Finally, both Momo and Huya have an international expansion opportunity. It's exciting, but international expansion pits each company squarely against its respective U.S. rivals. For example, in Momo's third quarter, it stated that India is a key growth market for its Tantan dating app. The top dating app in India is currently Tinder, and OkCupid is one of the fastest growing. Both are Match Group brands.
Similarly, Huya sees promise in Latin America, where it's targeted 20 million monthly average users by the end of the year. But two of Huya's biggest international markets, Brazil and Mexico, are markets in which Twitch (owned by Amazon) already operates as well. In short, international growth won't be as easy as growth in the insulated Chinese market.
Having accounted for these similarities, we can finally move on to the individual bullish cases for both companies.
The case for Momo
Momo is an app that connects people based on their interests. It's often used to find romance, but it can be used in other ways too. Tantan is more of an app used exclusively for dating. Both allow live streaming and monetize the apps through virtual gifts. These "gifts" are purchased by viewers to give to content creators. And gifts are virtually pure profit since they are (ahem) virtual. But the platforms are also monetized through ads and subscriptions, among other things.
Momo's apps took a big hit earlier this year as China cracked down on the Tantan app for fear it was being used for prostitution. Payments were suspended. And Momo took down its namesake app while conducting an internal review. Fortunately for the company, the disaster was short-lived, and both apps are back up and running.
In the first quarter, Momo reported 5 million paying customers. With this crackdown setback, paying customers dropped to 3.2 million in the second quarter. But an encouraging sign is that this has now recovered to 4.1 million paying customers. And even with the extreme quarter-over-quarter drop in payments, the company is growing so fast that revenue for the quarter was still up 32% year over year to about $590 million, and its cash position grew almost $200 million to around $1.8 billion.
The case for Huya
One of the main revenue sources for Huya is -- you guessed it -- virtual gifts. The business model is pretty similar to Momo's. The main difference is that Huya is live streaming video game content, much like Twitch does. As long as creators continue live streaming and users grow and become more active, it follows that Huya will be able to continue monetizing the platform.
In Huya's third quarter, it reported 146 million monthly active users -- up a robust 48% year over year. Paying users (gifters) didn't grow quite as fast but were still up 29% to 5.3 million people. These strong results increased the company's cash position by $42 million. Its growing $1.3 billion cash pile is massive, especially when considering its market cap is less than $5 billion.
The better buy
I can't deny Huya's popularity as evidenced by its 146 million users. But to me, the platform is appealing to one kind of user: gamers. That's not a bad thing; it's just limiting. I like Momo's broader application, even if it's only normally used for dating purposes. Further, to me, Momo has already proved to have staying power, as evidenced by its user recovery. I'm not convinced Huya will ultimately have that same kind of loyalty. For this reason, if I had to choose one of these stocks today, I'd go with Momo.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Match Group. The Motley Fool recommends HUYA Inc. and Momo. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.