Better Buy: MercadoLibre vs. iQiyi

It's a tale of two regions for growth investors these days. Latin America is still a hotbed for the right stock, but China remains a cold market for most of its former dot-com darlings. We're seeing that play out if we pit MercadoLibre (NASDAQ: MELI) against iQiyi (NASDAQ: IQ). The leading online marketplace through Latin America is hitting new all-time highs, with MercadoLibre stock more than doubling so far in 2019.

Things aren't going as well for iQiyi shareholders. The operator of China's leading streaming video platform may be trading higher year to date, but the shares are still trading 60% lower than they were when they peaked last June. Both companies are dominant in their industries within their geographical strongholds, but which one is the better investment at this point? Let's size them both of up to see which one makes the better case to be in your portfolio.

The good and bad of iQiyi

When China's leading search engine spun off iQiyi 15 months ago it seemed like a great way for investors to buy into one of Baidu's (NASDAQ: BIDU) fastest-growing businesses, and in many ways, iQiyi has lived up to its potential. Revenue rose 43% in its latest quarter, fueled by a 64% surge in the membership services revenue that now accounts for half of its business. iQiyi continues to be a streaming service that most of China enjoys as a free ad-supported platform, but with ad revenue flat over the year -- and now no longer the biggest top-line contributor -- the emphasis is correctly placed on its 96.8 million largely paying subscribers.

Two knocks on iQiyi are that it's far away from profitability and that its guidance last time was disappointing. There's a lot of red ink at iQiyi as it invests in premium content to grow its subscriber base, and its operating loss nearly doubled in the first quarter. Analysts aren't holding out for a profit until at least 2022. iQiyi's outlook for revenue growth to decelerate to a modest 12% to 18% in the current quarter is also a concern. However, with iQiyi nearly back to its $18 IPO price investors can cheat the system by buying into a platform that is more prolific than it was early last year for the same price as institutional investors did 15 months ago.

The good and bad for MercadoLibre

It may seem harder to find something bad to say about MercadoLibre given the stock hitting fresh all-time highs late last week, but buying into the online marketplace isn't without its risks. High inflation in some of the countries it operates can result in lumpy financials, and there's naturally going to be geopolitical risks in some of the more unstable areas where MercadoLibre is popular.

However, MercadoLibre's momentum is a lot stronger than iQiyi these days. Revenue growth is accelerating for the third of the past four years. MercadoLibre did see its profit shrink substantially in 2017 with an outright loss in 2018, but it's on track to return to profitability this year -- and build on that dramatically in the years to come.

Net revenue rose 48% in MercadoLibre's first quarter, stronger than iQiyi. Net revenue actually soared 93% in local currencies, but that's the inflation and forex concerns bubbling up again. MercadoLibre surprised investors with a profit for the quarter, a welcome contrast to the widening deficit at iQiyi.

Here comes the plot twist

Picking a winner isn't as easy as it seems. MercadoLibre clearly has every argument in its favor, and iQiyi is rightfully out of favor given its bottom-line funk and the sharply decelerating revenue growth. It also doesn't help that stateside investors are largely steering clear of Chinese growth stocks given the U.S. trade tariff tensions with the world's most populous nation.

I think both stocks will beat the market at this point, but if I had to pick a near-term winner, I would have to go with iQiyi. It has a dominant market position in a booming industry, and there's a lot to like in its ability to convert freeloaders into paying customers. Its subscriber count has soared 58% over the past year. MercadoLibre already has a lot of its current success discounted in its buoyant share price. iQiyi is the one with more near-term upside, especially if its guidance proves conservative and the relations between U.S. and China improve to the point where stateside investors tiptoe back into the dynamic world of Chinese growth stocks.

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