I struggle with iQiyi (NASDAQ:IQ). It was one of the my best finds in 2018 and I found it early, near $20-per-share. IQ stock churned in the low $20’s and abruptly took off, climbing north of $30 almost instantly, then $40.
I hate when that happens, honestly.
I love the underlying story — it being “the Netflix (NASDAQ:NFLX) of China” and all — but when you snag more than a 50% gain in a few weeks, there’s an overwhelming sensation to sell it now and buy it back later. Instead of a devil and an angel, we have a long-term fundamental investor on one shoulder and an anxious, lock-in-the-profits-now! investor on the other.
Ultimately we locked in the profits because that’s what we felt most comfortable doing. Of course, I anticipated maybe a few more dollars of upside — say from $33 to $35 or $36 — before a pullback. I didn’t think a rally would take it all the way to $44 on a closing basis.
The success of IQ stock has helped other hot Chinese names too, including Sogou (NYSE:SOGO), HUYA (NYSE:HUYA) and Bilibili (NASDAQ:BILI). These companies also have good fundamental stories and hopefully we’ll get a chance to buy them once they cool off.
Is IQ Stock Really the NFLX of China?
After the big rally in IQ stock, it now has a market cap close to $27.5 billion. That’s more than double where it stood earlier this year, a sum that seemed far too low for a platform with this strong of subscriber growth.
At year-end 2015, iQiyi had about 10 million subs, then roughly 30 million by year-end 2016. At the end of last year, it was up to 50 million. In just three months since, the figure has already grown to 60 million. That 20% jump — quarter-over-quarter, mind you — shows just how much runway iQiyi has.
IQ may not be profitable like HUYA and SOGO, but given its stellar subscriber growth, it’s no wonder investors are excited. Netflix has subscriber growth momentum too and now its $177 billion market dwarfs many of its competitors. Even Disney (NYSE:DIS), which is down at “just” $160 billion.
Operating in the tight-walled China, a country that can keep foreign competitors like Netflix out, should pave a long runway of success for iQiyi. (Note that IQ has a content licensing agreement with NFLX).
Furthermore, IQ is majority owned by Baidu (NASDAQ:BIDU), which has a near-80% stake. It was a spinoff by BIDU, a company that still works closely with IQ to help with A.I. functions, search and other tech areas to make its life easier.
For comparison purposes, imagine if Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) had spun out Netflix, retained an 80% position and helped it on the tech side. Yeah, it’d be a pretty good investment from the IPO.
Trading IQ Stock
Some are wondering now, has IQ stock hit its ceiling?
IQ stock fell 3% on Tuesday, but the losses would have been worse if it weren’t for a late-afternoon bounce. When a stock (or a group of stocks in this case) begin to go parabolic, there’s no telling how far it will rally.
At this point, IQ stock could be showing signs of exhaustion, recently having an RSI of 90. Even now, its RSI is still all the way up at 85 (blue circle). But like I said, once investors hop on the momentum train, it can be a long time before it goes back to its first stops. Is it going across town or across the country? We don’t know yet.
Before IQ stock makes its big rallies, it tends to consolidate its prior move first. While these phases were brief, they gave investors a clue on what was to come. You can see these periods on the chart in blue rectangles. Coincidentally (or not) the two most recent consolidation areas come into play around the 38.2% and 61.8% retracement levels.
Should IQ stock start to pullback, these are the levels to watch.
Still, keep in mind that IQ stock could follow in the steps of Twitter (NYSE:TWTR), Shake Shack (NYSE:SHAK) and Twilio (NYSE:TWLO) with their IPOs. These stocks went on massive rallies before collapsing and trading sideways for several years.