Tech IPOs have made a robust comeback this year. Yet the volatility has been gut-wrenching. Just look at iQiyi (NASDAQ:IQ), which pulled off its public offering in late March. Since then, IQ stock has had a range of $15.30 to $46.23.
And as of now, the shares have come down to about $31.
So what’s going on here? Well, part of the volatility is normal for any red-hot company. Keep in mind that IQ stock is often referred to as the Netflix (NASDAQ:NFLX) of China. So yes, there are many investors who see this as a ground-floor opportunity to snag a huge winner.
But at the same time, IQ faces some challenges. First of all, the Chinese market has come under lots of pressure lately as President Donald Trump’s tariffs have had a negative impact on sentiment.
In the meantime, IQ stock also has the risk of fierce competition. The two main rivals include Tencent (OTCMKTS:TCEHY) and Alibaba’s (NYSE:BABA) Youku Tudou. There is also emerging competition from traditional media operators, such as TV stations that are relying more on Internet offerings.
The Pros on IQ Stock
Even with the challenges, I still think IQ still has more room on the upside.
Note that the secular trends in China remain particularly strong. According to iResearch Report, the online entertainment industry is expected to generate revenues of RMB688.4 billion in 2022, up from RMB156.9 billion in 2016.
Some of the drivers include the ubiquity of smartphones, large social platforms and engaging content. But in the years to come, there should be other factors like AI (Artificial Intelligence).
Next, IQ has a powerful platform. Then again, it certainly helps that the company is a part of Baidu (NASDAQ:BIDU), which has provided access to an extensive distribution footprint as well as cutting-edge technologies. Even after the IPO, BIDU still has a major equity stake.
As for IQ, the company has proven to be skilled at developing must-see content. Consider that last year IQ had five of the top 10 original Internet variety shows and six of the top 10 original dramas.
The result is that the company has been able to quickly build a massive user base (the company generates revenues from a blend of ads and subscriptions). There are over 50 million subscribers and 421 million MAUs (Monthly Active Users).
And yes, growth on the top-line has been sizzling. During the latest quarter, revenues spiked by 57% to $776.6 million. There was roughly an equal split with ads and subscriptions indicating that the revenue base is fairly diverse.
Bottom Line on IQ Stock
When it comes to the iQIYI-Netflix comparison, it is still a bit of a stretch. Netflix has been in existence for much longer, has a presence in many countries and has a much bigger library of premium content. The business model is also based mostly on subscriptions.
However, iQIYI still has a tremendous amount of momentum and a strong leadership position.
According to InvestorPlace.com’s Laura Hoy: “There’s also the fact that China has an enormous population that is making its way online quickly, creating a huge growth runway just within the country itself.”
Besides, the company does not have to worry about fending off NFLX either!
Now IQ stock will likely continue to be volatile. This is natural for any newly public company. But for those investors looking for a pure-play on China’s entertainment industry, IQ stock is a good pick.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.