If the name iQiyi, Inc (NASDAQ:IQ) doesn’t ring a bell with you, there’s a perfectly good reason. Until late March of this year, IQ stock wasn’t a publicly-traded instrument. It also doesn’t take aim at the North American market, instead serving China’s fast-growing consumer market.
Regardless, it’s a name all U.S. investors would be wise to become familiar with, as it’s got massive potential.
It also packs plenty of risk, to be clear, and will almost certainly dish out lots of volatility for the foreseeable future. If you can handle that usual post-IPO dance though, it just might be worth the trouble.
It’s most often compared to Netflix, Inc. (NASDAQ:NFLX). While it’s not a bad description if the aim is only to point would-be investors in the right direction, iQiyi isn’t exactly a carbon copy of the West’s most popular video streaming service.
Yes, the company sells subsection-based access to on-demand video. It generates more revenue, however, by inserting advertisements into video streams, a la YouTube. It even drives a little revenue by creating and licensing content to other venues. The model isn’t expected to change dramatically anytime soon.
Business is good too. Last quarter’s top line grew 57% year-over-year, leaving no reason to doubt the company won’t be able to generate the roughly 45% it suggested was in the cards for the quarter currently underway. It’s still losing money, but that’s not been a significant liability for any growth company in a long, long time.
That trailing growth and encouraging outlook beg one question: Why would Baidu Inc (ADR) (NASDAQ:BIDU) cede complete control of iQiyi and take the company public in the United States in late March?
Baidu still owns a large swath of IQ stock, to be clear, effectively claiming control of about two-thirds if iQIYI. The sale of the other third to other investors, however, raised $2.3 billion worth of capital that can be used to fund a variety of investments in an already-growing venture.
Pump Is Primed for IQ Stock
Still, with IQ stock up more than 90% from its March IPO price of $18 per share and up 121% from its post-IPO tumble, is this name safe enough to step into now?
As is usually the case, it depends.
iQiyi undoubtedly will continue to gyrate, as insiders cash out and outsiders try to determine if this is indeed the next Netflix, or the next disaster — in the same vein as Snap Inc (NYSE:SNAP). As time marches on though, investors are likely to increasingly realize that where iQiyi is now in China is where Netflix was in the United States a decade ago. And, Netflix’s breakout growth then had more to do with the explosion of higher-speed broadband, and mobile broadband in particular.
China is in the midst of that evolution right now, but still has far to go on that front.
Specifically, as of the end of last year, only 56% of China’s population had access to the internet, and it won’t be until this year that China’s residents will collectively spend more time on their smartphones than they will spend watching television.
That’s in a country that’s still not fully built out the internet infrastructure to fully serve all 1.4 billion of its people. The introduction of that remainder as well as the wooing of the country’s 770 million existing regular internet users — iQiyi reports it has about 420 million monthly viewers in tow — leaves iQiyi lots of room to grow, and reason to expect growth.
Bottom Line for IQ Stock
For investors who can look far enough down the road, there’s opportunity here. Would-be buyers of IQ stock, though, have to be able to keep their eyes focused on what’s down the road even when things get a bit hairy and scary in the meantime. Indeed, the smart-money move may well be to remain on the sidelines until all the short-term volatility has run its course. There’s the proverbial rub.
Whatever’s in the cards for the stock in the near-term, take solace in the fact that iQiyi is being compared to Netflix so closely that it’s being called the Netflix of China. It’s an accolade that’s often accompanied extreme success.
Cases in point: Baidu is the “Google of China,” and that’s worked out well for BIDU shareholders. Alibaba Group Holding Ltd (NYSE:BABA) is likened to Amazon.com, Inc. (NASDAQ:AMZN), and the stock of the former has been similarly rewarding as the stock of the latter. Weibo Corp (ADR) (NASDAQ:WB) is the Twitter Inc (NYSE:TWTR) of China, and has arguably outperformed its western counterpart. It’s telling that the market’s already made the comparison between Netflix and iQiyi.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.