The hottest Chinese stock on the U.S. market today is a video streamer called IQIYI (NASDAQ:IQ).
Its initial public offering in March, at $18 per share, was called a flop, as the stock dropped 14% its first day, but since then the stock has doubled in price, opening for trade Aug. 9 at $29.35 per share.
IQIYI is not a new company. It is controlled by Baidu (NASDAQ:BIDU), a search engine sometimes called the “Google of China” and, sometimes, the “Netflix of China”.
But neither description is accurate.
For starters, both companies are much, much smaller than their U.S. counterparts. Baidu’s 2017 revenues were about $12 billion; IQIYI just $38 million. Also, the Chinese market is not the U.S.
What They’re Buying
What made IQ stock hot is growth — 51% year over year, according to the second quarter report announced on July 31. It’s growth from a small base, but revenues came in at $932 million for the quarter, losses at $316 million. The big number was a 75% increase in subscribers to 67.1 million.
Baidu sees IQIYI as a vehicle for financing video rights and production, and the company has been getting into sports, kids’ shows and video games. It even has a content deal with Netflix (NASDAQ:NFLX).
Note that while we think of Netflix as mainly happening on living room TVs, IQIYI is seen happening on phones and tablets. Another reason not to compare the two is the nature of China’s streaming market. While Netflix faces little direct competition in the U.S., IQIYI faces units of Tencent Holdings Ltd. (OTCMKTS:TCEHY) and Alibaba Group Holding (NASDAQ:BABA). Its tie to Baidu, with over 70% of the China search market, is essential to its success.
Watch the Yuan
Since this is a Chinese stock in a Chinese market, investors should mind the trade war and the price of the Yuan, which has fallen over 10% against the dollar this year. The value of China’s currency is tightly controlled, within bounds, by the government, and a move to make it even cheaper, to keep the country growing in the face of Trump tariffs, can’t be discounted. In any case the Yuan has already been a strong headwind this year for all Chinese stocks, with BIDU down 7.5% so far in 2018, Alibaba down 4%, and Tencent down over 20%.
That also means tariff peace would be positive for both Chinese stocks and the currency. An administration that creates a crisis can quickly end it — and ending it would prove profitable for any investor with money in China.
Watch the Hype
A bigger point to consider is the hype surrounding IQ stock.
IQIYI gets a lot of subscribers because the service is dirt cheap — $374 million in second quarter subscriber revenue was spread across 67 million members. But its content is also supported by advertising, which exceeded subscriber revenue in the quarter. And it’s not aiming at families so much as young teenagers and young adults, its most popular show being The Rap of China. CEO Tim Yu Gong rejects the comparison to Netflix.
It’s more accurate to say that if you married MTV to HBO, then made it a streaming service, you’d have something like IQIYI. Gong calls it an “ecosystem” of interlocking content, but its target market is clear: the “Little Emperors” who’ve grown up in a prosperous China and want diversion.
It’s also younger U.S. investors who are snapping up IQ stock, seeing it as their chance to grab the brass ring of fat profit, now that companies like Netflix and Alphabet (NASDAQ:GOOGL) are all grown up.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA.
