China’s self-reliant innovation strategy has been gaining traction over the past couple of years. The country’s efforts made to ensure improved security and better user experience should enable Chinese companies to gain widespread recognition in the future. 

Weibo Corporation (WB) and iQIYI, Inc. (IQ) are two prominent players engaged in the Internet industry in China. WB operates as a social media platform for people to create, distribute and discover Chinese content. It enables its advertising and marketing customers to promote its brands and services to users. In comparison, IQ provides online entertainment services. The company offers various products and services comprising internet video, online games, live broadcasting, online literature, animations, e-commerce, and a social media platform. It also provides membership, content distribution, and online advertising services.

In the past month, WB has experienced 4.7% gains and IQ had a 15% loss. But which of these stocks is a better pick now? Let us find out.

Recent Financial Results

WB’s net revenue for its fiscal 2021 third quarter, ended September 30, 2021, increased 30.4% year-over-year to $607.43 million. The company’s non-GAAP income from operations came in at $248.70 million, up 38.6% from its year-ago period. While its non-GAAP net income increased 37.1% year-over-year to $209.55 million, its non-GAAP EPS increased 36.4% to $0.90. As of September 30, 2021, the company had $1.83 billion in cash and cash equivalents.

For its fiscal 2021 third quarter, ended September 30, 2021, IQ’s net revenues increased 5.6% year-over-year to $1.20 billion. The company’s operating loss came in at $212.30 million, representing a 13.1% rise from the year-ago period. Its net income increased 47.3% year-over-year to $268.40 million. IQ’s net loss per ADS came in at $0.34, indicating a 34.8% rise from the prior-year period. The company had RMB7.30 billion in cash and cash equivalents as of September 30, 2021.

Past and Expected Financial Performance

WB’s EBITDA and total assets grew at CAGRs of 7.7% and 31.9%, respectively, over the past three years.

Analysts expect WB’s EPS to increase 29.4% year-over-year for the fiscal year 2021 and 12% in 2022. Its revenue is expected to grow 33.2% year-over-year in the fiscal year 2021 and 11.9% in 2022. The company’s EPS is expected to grow at a rate of 15.8% per annum over the next five years.

In comparison, IQ’s total assets increased at a CAGR of 6.2% over the past three years. Its EBITDA declined at a CAGR of 10.7% over the past three years.

IQ’s EPS is expected to remain negative in the fiscal year 2021 ended December 31, 2021, and 2022. However, the company’s revenue is expected to increase 4.8% year-over-year in the fiscal year 2021 and 6.5% in 2022. Analysts expect the company’s EPS to grow at a 9.9% rate per annum over the next five years.

Valuation

In terms of non-GAAP P/E, WB is currently trading at 10.85x, compared to IQ’s negative 3.76x. In terms of trailing-12-month Price-to-Book, WB’s 2.38x compares with IQ’s 3.31x.

Profitability

IQ’s trailing-12-month revenue is almost 2.2 times WB’s. However, WB is more profitable, with an 83.2% gross profit margin versus IQ’s 11.9%.

Furthermore, WB’s ROE, ROA, and ROTC of 11.4%, 6.7%, and 8%, respectively, compare with IQ’s negative values.

POWR Ratings

While WB has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, IQ has an overall D grade, equating to Sell. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

WB has a B grade for Quality, consistent with its higher-than-industry profitability ratios. WB’s 15.9% trailing-12-month net income margin is 142.8% higher than the 6.5% industry average. IQ’s D grade for Quality is in sync with its negative net income margin.

WB has a B grade for Value, in sync with its lower-than-industry valuations. WB has a 2.26 forward Price/Book ratio, 16.8% lower than the 2.71x industry average. IQ’s C grade for Value reflects its slightly higher-than-industry valuation ratios. IQ’s 4.81 forward Price/Book multiple is 77.3% higher than the industry average of 2.71x.

Of 50 stocks in the China industry, WB is ranked #3. In comparison, IQ is ranked #41.

Beyond what we have stated above, our POWR Ratings system has also rated WB and IQ for Sentiment, Momentum, Stability, and Growth. Get all WB ratings here. Also, click here to see the additional POWR Ratings for IQ.

The Winner

Given China’s long-term strategy for the growth of its technology sector, both WB and IQ should benefit. However, higher profitability and lower valuations make WB a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the China industry.

WB shares were trading at $33.43 per share on Friday afternoon, down $0.05 (-0.15%). Year-to-date, WB has gained 7.91%, versus a -1.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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