Chances are many investors haven’t yet heard of iQiyi, Inc (NASDAQ:IQ). Many are dubbing it the “Netflix, Inc. (NASDAQ:NFLX) of China” and as a result, some investors are getting excited about IQ stock. After a quiet IPO in late-March, shares are really catching fire now.
Should you hop on board? Let’s take a look
Sizing Up IQ Stock
We pulled up iQiyi’s prospectus for SEC.gov, which showed just how fast it was growing. At year-end 2017, iQiyi had 50.8 million subscribers who spent on average 1.7 hours per day on the platform. Before that, it had just 30.2 million subs at year-end 2016 and only 10.7 million in 2015.
After the first quarter of 2018, IQ’s subscriber count jumped to 60.1 million, a gain of 18% in just a few months. It’s important for investors to note how much larger of a nation China is, population wise, versus the United States. That gives the company so much more potential.
As of 2017, China had 731 million internet users , more than double the entire U.S. population for those keeping tabs. Of these users, 30%, or 219 million, watch online videos every month. Admittedly, that data is a year old, but it helps show just how large of a market China is.
Baidu recently spun IQ stock out as an IPO and still owns close to 80% of the company. That means that despite the monster rally in iQiyi stock over the past few weeks, there’s a small float available to public investors.
Finally, investors should know that IQ is not strictly a monthly subscription business like Netflix, as it also generates revenue via advertising. Further, it has an original content deal with NFLX, something I believe benefits both sides. Importantly, it leaves the Chinese market to IQ.
Growth and Value of IQ Stock
Now at 60 million paying subscribers, IQ is at nearly half of NFLX’s 125 million first-quarter total. Shares are up 80% over the past month, but before that move, the argument was that IQ’s $13 billion market cap was simply way too low. Now standing at $20 billion vs. NFLX’s $157 billion market cap, IQ still seems too low.
Keep in mind, NFLX has a larger market cap than both Walt Disney Co (NYSE:DIS) and Comcast Corporation (NASDAQ:CMCSA). Also note that finding a valuation for IQ isn’t a simple task. For instance, we can’t simply say it has half the subscribers as NFLX, so it deserves half the market cap, i.e. iQiyi stock should have a ~$78 billion valuation.
IQ just grew sales 49% last quarter and expects mid-40% growth this quarter. It’s partnership with Baidu will make life much easier — imagine NFLX having been majority owned and helped by Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG).
While it’s not yet profitable, IQ has bursting sales and a subscriber base that’s bound for 150 million in the not-too-distant future. Heck, it grew its base almost 20% in 30 months!
NFLX stock trades at about 10 times this year’s sales, while iQiyi stock trades at roughly 5.4 times this year’s sales despite its superior growth profile. I’m not saying IQ should trade in-line with NFLX, but I don’t know that the discount on a sales-based valuation should be 50%. So while the stock may be overheating in the short-term, I do think IQ is worth more than $20 billion.
Trading iQiyi Stock
We first took a look at IQ stock here on InvestorPlace back when shares were trading for around $20. We were so lucky to see a few early Twitter Inc (NYSE:TWTR) posts on the name and do some further digging. Now though, iQiyi has been a rocket ship. Did we miss our chance?
IQ has shown a tendency to rally, then consolidate. There’s been plenty of volatility to start the week, with up 11% at one point Monday morning, only to be down 2% less than an hour later. Maybe shares will pullback or at least consolidate.
I would pounce on a pullback if I were looking to buy iQiyi stock. As momentum traders get in on IQ, the moves in each direction can be big. But the fundamentals are promising on this one.