Better Buy: Momo vs. Baidu

Momo app running on a smartphone.

Chinese stocks have been getting a lot cheaper in recent months. Shares of Momo (NASDAQ: MOMO) and Baidu (NASDAQ: BIDU) have fallen 55% and 41%, respectively, since hitting springtime highs, though both stocks remain big winners for longtime investors.

Momo and Baidu don't have a lot in common beyond being internet businesses in China, but these days that's enough. The market has soured on Chinese growth stocks as trade tariff tensions and a flight to quality find growth investors taking their swings for the fences closer to home. The good news for investors who own either stock or are considering grabbing a piece of Momo or Baidu is that the fundamentals continue to improve despite the cascading share prices. Momo and Baidu haven't been this attractively priced in a long time. They're both positioned well to bounce back in 2019, but let's size them up to see which one is the better buy of the two.

Cheap in China

Momo got its start in online dating, and it doubled down on that front with the acquisition of the Tantan social dating app earlier this year. The biggest driver at Momo these days is its platform that provides live video streams, a sticky app that's generating heady growth. Net revenue soared 51% in its latest quarter , and Momo is targeting 43% to 47% top-line growth for the current quarter.

Baidu is growing more slowly. The company behind China's most popular search engine saw revenue climb 27% in its latest report. Baidu's guidance for the current quarter also suggests deceleration, as the dot-com giant sees 20% to 26% in top-line gains adjusted for recent asset sales (or a gain of 15% to 20% on a reported basis).

Wall Street's bracing for the current quarter's deceleration to carry over into 2019. Analysts see revenue growing 22% at Momo and 16% at Baidu in the year ahead. Both companies work on thick margins, though analysts see adjusted earnings rising at a slower clip than revenue next year. Wall Street's modeling 19% in bottom-line growth at Momo for 2019, and a 10% uptick at Baidu.

The good news for investors is that analysts have historically overestimated the slowdown. Baidu and Momo typically beat Wall Street targets as well as their own public guidance. Both companies are milking more money out of their core audiences. Momo's monthly active users have grown by 17% over the past year, but it made revenue grow at three times that clip by getting more of its users to pay for premium offerings. Baidu has seen its active online marketing customers grow by just 7% over the past year, largely by design as they weed out iffy advertisers. The good news is that the average revenue per online marketing customer on Baidu has soared 12% over the past year.

This all leads us to the ridiculously cheap profit multiples for both stocks. Baidu is fetching just 16 times next year's profit target, and keep in mind that it has beat analyst estimates by a double-digit percentage margin in each of the past four quarters. Momo is going for less than nine times earnings, 8.7 to be exact. Both companies are trading at or near historic lows in terms of earnings-based valuations.

Picking a winner

The logical pick seems to be Momo. It is growing faster, but trading at a lower earnings multiple. However, I'm giving Baidu the nod here because it has been consistently great.

Momo is a rock star. Its revenue has soared nearly 14-fold over the past three years. The fact that you can buy it at a single-digit forward earnings multiple is a joke with a dinner bell as the punchline. However, Momo's success is riding largely on a live broadcasting platform that can fade in popularity just as quickly as it has erupted. Baidu, on the other hand, has watched over China's undisputed search engine leader for nearly two decades.

Both stocks should beat the market in 2019, and Momo will likely be the better performer if it can continue to surpass expectations. However, Baidu's winning streak in a business that is far more difficult to disrupt makes it the winner in this battle. Investors are already taking a risk when they buy into Chinese internet growth stocks; softening that risk by going with a reliable juggernaut feels like the right call.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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