iQIYI, Inc (NASDAQ:IQ) benefits from the same protection from foreign competition that other Chinese companies enjoy and for now that’s helping IQ stock a bit.
Much like the protection Baidu (NASDAQ:BIDU) enjoys from Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) or that Alibaba (NYSE:BABA) or JD.Com (NASDAQ:JD) have from the Amazon (NASDAQ:AMZN) threat, IQ stock benefits from not having to compete against Netflix (NASDAQ:NFLX).
However, with the looming U.S. trade war, the stock lost about 10% of its value since June 20, bottoming out at a little more than $29 before regaining a bit. It now sits at about $34. While I do not think a trade war poses a problem for IQ stock, the financials of this company should give investors pause.
IQ Stock Still Is Appealing
Investors can easily understand the appeal of IQ. iQiyi has become the Chinese company most closely resembling Netflix. Many investors lament the fact that they missed the meteoric rise of NFLX stock and see IQ as a second chance.
NFLX has reached a market cap of about $177 billion. In contrast, the market cap for IQ stands at around $21 billion. Prospective iQiyi investors will also like the fact that the company brings in more revenue per quarter than Netflix.
It also enjoys a larger overall subscriber base even though it only operates in one country. Netflix remains ahead of iQiyi with paid subscribers (60 million for IQ vs. 125 million for NFLX).
iQiyi had just five million paid subscribers in 2015, so this gap continues to close. When the company counts those who use the free ad-sponsored platform, the number of users tops 400 million.
Financial Statements and iQiyi
However, the higher growth numbers mask some troubling financials. Despite higher revenues, the company pays heavily to bring in that cash. Revenues only exceeded the cost of revenue by 29 million yuan ($4.37 million) in 1Q 2018.
When operating expenses are added, its reported an operating loss of over 1 billion yuan ($159.9 million). Netflix enjoyed an operating profit of $447 million in the same quarter.
The balance sheet also indicates funding issues. IQ stock’s current ratio (current assets divided by current liabilities) stands below 0.5. A current ratio below one calls into question a company’s ability to meet its current expenses.
Accounts payable alone amounts to over 8.73 billion yuan ($1.31 billion). Current assets stand at 6.05 billion yuan ($910.3 million). Hence, IQiyi lacks the resources to meet this expense, let alone its other current liabilities.
Also, this company holds 23.84 billion yuan ($3.59 billion) in what it describes as “other long-term liabilities.” The cash flow statement confirms this. iQiyi raised 6.07 billion yuan ($914.09 million) with “other financing activities” listed separately from debt issued. This leads to a stockholders’ equity of -14.36 billion yuan (-$2.16 billion).
Strategically, IQ Isn’t “Netflix of China”
Although I have disparaged NFLX stock in the past, I based that criticism on valuation. Netflix supports a solid balance sheet and has become one of the most visionary companies in tech. IQ faces more serious issue than a high price-to-earnings (PE) ratio or its lack of a PE. The company likely left billions in yuan on the table by holding on to ad-sponsored customers who bring in lower revenues.
Moreover, analysts forecast losses for iQiyi through at least 2020. This means it will likely resort to the same undisclosed funding sources that have supported IQ in the past. Many investors will try to get that second chance at the next Netflix by buying IQ stock. However, they will buy a company that lacks the strategic insight and financial stability of its non-China counterpart.
The Bottom Line on iQiyi
Investors should question the financials behind IQ before investing. Without a doubt, many will like the subscriber growth rates and higher revenues that come with iQiyi. Still, investors need to remain aware of its troubled financial statements.
The inability to cover immediate expenses as well as its mysterious funding sources should create concern.
Admittedly, just because iQiyi’s funding sources remain unknown does not mean it engages in nefarious financial activities. However, investors can also buy into other up-and-coming companies who do not bear this financial risk. Given the options available, I see no reason to risk precious capital on IQ stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.