Why I'm Buying Baozun But Avoiding Momo

Two dice displaying

Chinese tech stocks Momo (NASDAQ: MOMO) and Baozun (NASDAQ: BZUN) both posted triple-digit gains this year, but those rallies abruptly ended with double-digit declines after they released their earnings reports in late August. But the odd thing is that both companies soundly beat analyst expectations.

Momo, which produces a social app for chatting with nearby users, saw its second quarter revenue rise 215% annually to $312 million -- beating estimates by nearly $26 million. Its non-GAAP net income nearly tripled to $0.35 per share, topping expectations by four cents. Its monthly active users (MAUs) rose 22% annually to 91.3 million.

Baozun, which helps companies establish an e-commerce presence with digital storefronts, marketing, customer service, fulfillment and IT services, saw its quarterly revenue rise 25% annually to $131 million, beating expectations by $0.4 million. Its non-GAAP earnings jumped from $0.02 a year ago to $0.11 per share, topping estimates by a penny. Its total GMV (gross merchandise volume), or the total value of all goods sold through its ecosystem, rose 64%.

Some investors might consider Momo and Baozun's post-earnings dips to be great buying opportunities. But after taking a closer look at both stocks, I decided to avoid Momo and buy more Baozun instead.

Why I'm avoiding Momo

Momo's numbers initially look great , but its 215% sales growth last quarter represents its slowest growth in five quarters. Momo expects its sales to decelerate further with just 115%-118% growth this quarter, and analysts expect its full-year revenue to rise 135% this year -- versus 313% growth last year.

Momo's cost and expenses also jumped 189% annually to $246 million, or 79% of its total revenues, last quarter. Higher broadcaster revenue shares on its live video platform, payment channel fees, marketing, and infrastructure expenses all boosted that figure. Those expenses could keep rising as bigger rivals like Tencent and Weibo expand their own live video ecosystems.

Momo's user growth looks impressive on an annual basis, but on a sequential basis, its MAUs grew just 7%. Its total paying users -- customers who buy paid subscriptions for live video channels or virtual gifts for their favorite broadcasters -- stayed flat sequentially at 4.1 million.

That's troubling, since Momo's investments in its live video ecosystem, which generated 83% of its revenues during the quarter, are becoming a major operating expense. If those rising expenses eclipse Momo's revenue growth, its bottom line growth could crumble. Momo admittedly looks cheap at 22 times forward earnings, since analysts expect its earnings to jump 92% this year, but the risks outweigh the rewards.

Why I'm buying Baozun

Baozun's year-over-year growth doesn't look as impressive as Momo's, but its 25% sales growth last quarter actually beat its 21% growth in the first quarter. Analysts expect its revenue to rise 20% this year, compared to 30% growth last year.

Baozun is riding on two powerful tailwinds. First, China has an internet penetration rate of 52% and a rapidly growing middle class. This means that an increasing number of brick-and-mortar retailers will turn to Baozun to digitize their businesses. Second, Alibaba (NYSE: BABA) -- the biggest e-commerce company in China -- is one of Baozun's biggest investors.

This means that any retailers who want to set up shop on Tmall or Taobao will likely go to Baozun. That's why its number of brand partners -- which already include Starbucks , Microsoft , Nike , and Coach -- grew 17% annually to 140 last quarter. Baozun is also bolstering its IT, cloud-based operating platforms, analytics, and AI capabilities -- which should improve the overall experience for its customers while widening its moat against potential rivals.

Baozun's total operating expenses gobbled up 96% of its revenues last quarter, but they rose just 22% annually -- which looks more manageable than Momo's triple-digit jumps in spending. Analysts expect Baozun's earnings to more than double this year, making its forward P/E of 25 look fairly cheap.

The key takeaways

Momo isn't down for the count yet, but investors should realize that its growth is decelerating and its costs are surging. Moreover, most of Momo's triple-digit growth comes from its live video platform instead of its core social networking features, leaving it vulnerable to bigger rivals or tighter government regulation of video streaming platforms.

Baozun's growth isn't as exciting as Momo's, but its enviable position as the "gatekeeper" to the Chinese e-commerce market makes it a great long-term investment in my book. The stock could remain volatile in the near term, but I believe that investors who buy these dips should be well-rewarded over the next few years.

10 stocks we like better than Momo

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Momo wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Leo Sun owns shares of Tencent and Baozun. The Motley Fool owns shares of and recommends COH, NKE, and SBUX. The Motley Fool recommends Momo and Weibo. 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.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.