IQiyi Stock Has Too Many Risks to Ignore

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IQ stock - IQiyi Stock Has Too Many Risks to Ignore

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At first glance, iQiyi (NASDAQ:IQ) resonates immediately with speculative investors. An advertisement-based, streaming TV and movie platform, analysts often consider iQiyi China’s Netflix (NASDAQ:NFLX). The American streaming giant has done wonders in the markets, so why should IQ stock be any different?

Sure, iQiyi mostly operates in one country. But when that target market represents about 18% of the total world population, its singular reach is no liability. Moreover, most retail-consumer based enterprises focus on China. Various companies like General Motors (NYSE:GM), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and the aforementioned Netflix seek strong inroads to the Asian giant.

The advantage for iQiyi, and by logical deduction IQ stock, is that it’s already there. And on paper, the company has the figures to back up investor bullishness.

For starters, iQiyi levers 126 million daily active users on mobile platforms. However, many of these users, or 53.7 million to be exact, also use the PC platform. Moreover, its monthly active users count is simply gargantuan at 421.3 million mobile users. Of course, this figure is about 90 million more than we Americans have people.

Not only that, iQiyi succeeds in substantive user engagement. According to the company’s registration statement with the SEC, iQiyi users watched 9.2 billion hours of video on its platform last year. This translates to each user watching an average 1.7 hours per day on their mobile app. I find that impressive because mobile streaming isn’t exactly the most comfortable experience.

Then again, this is China. Nowadays, the big movie studios like Disney (NYSE:DIS) depend on huge Chinese audiences for cinematic success. Aside from a few blips, the Chinese are ravenous consumers of American entertainment, thus raising the profile of IQ stock.

But does this mean you should jump on the iQiyi stock bandwagon?

IQ Stock Lacks Solid Fundamental Backing

InvestorPlace contributor Dana Blankenhorn had a humorous take on IQ in his recent article, “Don’t Hit the Buy Button on iQiyi Stock Just Yet.” He cited challenges to the company, ranging from fickle consumer tastes, tightening competition and potential draconian oversight. Blankenhorn concluded, “That said, if I were 30 years younger, I’d probably take the plunge in IQ stock. After all, I missed the run-up in Netflix, too.”

I believe he and I are on the same wavelength. I appreciate the dramatic run-up in IQ stock. After all, shares have skyrocketed since its initial public offering. But as Blankenhorn states, this is speculative pricing. The way I look at it, IQ’s fundamentals are more hollow than many appreciate.

For instance, the majority of iQiyi’s users use the free, ad-laced option. Paid subscribers exist, but the number falls off a cliff, a whopping 66 million at last count. That’s less than 16% of monthly mobile users. That compares poorly to Netflix’s 130 million worldwide members, of which nearly 57 million are from the U.S.

The paid user shortfall becomes pronounced as you dive into the financials. If you simply look at the top-line, you’d think iQiyi stock could easily launch into orbit. Last year, the company hauled in $2.64 billion, comparing very favorably to $825 million in 2015.

The problem is that net-income losses have widened as well, from a loss of $399 million to a loss of $567 million. Clearly, the advertisement-based business model isn’t working that well. To see further, sustained increases in IQ stock, management must boost its paid sub count.

That’s why I’m cautious on recent news that iQiyi closed a deal with Chinese travel company Ctrip.com (NASDAQ:CTRP). This deal involves perks for iQiyi’s prime members. But with relatively so few of them, the impact is likely limited.

Beware of Market Irrationality

Nevertheless, despite my concerns about IQ stock at this juncture, I most certainly wouldn’t short it. The markets are sometimes irrational, especially with hyped tech-related companies. Multiply that sentiment five-fold for Chinese tech companies.

Therefore, I wouldn’t be surprised if IQ stock manages to enjoy a nearer-term burst. But in the longer run, I view iQiyi as the Chinese Twitter (NYSE:TWTR). Like IQ, Twitter presented an interesting concept but with flawed fundamentals. Early bird investors waited years until TWTR became a viable prospect.

This is my fear for iQiyi stock.

Speculators can temporarily drive up shares. But if the fundamentals don’t match up, IQ stock can quickly tumble. So if you’re a conservative investor, my idea is to wait. I suspect a better entry point is coming.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/iqiyi-iq-stock-has-too-many-risks-to-ignore/.

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