Well I have read both stories and like them, but if I had to choose it would have to be Rainbow Factory.
Like everyone above me, I see Cupcakes as just gore and violence, and while Rainbow Factory has that it does have a plot and the characters were close to how the show portrays them. But the factor behind my choosing is this......what seems more sinister? Because honestly what is more scary, a lone psycho pony who wants to cut you up into cupcakes and wear your remains or the fact that if you fail a test you get swept off to be grinded into Rainbows and the ponies behind it just see you as nothing more then material?
Personally the whole secret-murder of ponies is more creepy. Cause looking at Pinkie you can kinda see that they may happen. But this is just my opinion.