IQ Stock Might Be Worth a Look If You Can Handle the Bumps

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IQ stock - IQ Stock Might Be Worth a Look If You Can Handle the Bumps

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Ever since shares of iQIYI, Inc. (NASDAQ:IQ) topped, albeit briefly, $46.23 in June 2018, IQ stock trended lower and has yet to recover.

The tariff trade war between the U.S. and China are partly to blame. Alibaba Group Holding Limited (NYSE:BABA) is down nearly 20 percent in the last quarter while iQIYI’s major shareholder, Baidu, Inc. (NASDAQ:BIDU) is down around 12 percent.

Baidu’s share sale of IQ stock in July did not help matters. For now, it looks as though investors wait for the selling pressure on the stock to end before considering a position.

Baidu and IQ Stock

Baidu filed to sell 7.2 million shares, worth $259 million on July 6. The sale unnerved investors because the company is still relatively new: the stock had an April IPO.

Others appear to be following Baidu’s lead by solidifying the gains post-IPO. At around 4.5 times book but barely any debt, the markets are still hesitant in assigning a premium on the stock.

Fundamentally, the company demonstrated a number of strengths in the second quarter. iQIYI had $2 billion in cash, so as long as its cash burn rate is in check, the company will not need to file a secondary offering or sell debt.

iQIYI continued to deliver on subscription growth. The company added 5.8 million subscribers in Q2 and now has 67.1 million as of the end of June 30, 2018. iQIYI grew subscriptions because customers are enjoying the premium content.

The new releasing format for “My Story for You” and “The Legend of Yun Xi” drew the premium members back to the site. VIP members are differentiated by the level of access. They may view all 48 episodes, whereas non-VIP members may only view six episodes a week.

Partnership with JD.com

iQIYI’s partnership with JD.com (NASDAQ:JD) gave annual subscription growth a lift. Both companies benefited by widening the target audience. Even though JD.com’s stock is down, the partnership will eventually pay off.

Together with mobile carriers and other partners, both companies will convert users into paying subscribers, driving revenue higher.

In the second quarter, iQIYI’s total revenue grew 51 percent from last year to RMB 6.1 billion (USD $900 million). Advertising revenue was equally impressive, rising 45 percent.

Advertisers are more than eager to buy ad space on the company’s platform and the self-produced variety shows. For example, Hot-Blood Dance Crew signed aboard 11 brand partners. The advertising formats included pop-up ads, embedded ads, and dance ads.

In-feed advertising also gave this segment a boost, as traffic for iQIYI’s trending video and Na Dou app improved. Looking ahead to the upcoming quarterly report, investors may expect some temporary headwinds in advertising revenue growth.

The one-time bump from the World Cup will slow advertising growth but the company will offset this weakness by launch new variety shows to grow membership signups.

Headwinds

The US/China trade war will have an indirect, negative impact on the company’s outlook. As the yuan slides, iQIYI’s U.S.-based numbers will get hurt slightly. Although unlikely, if China’s economy slows due to the tariffs the countries impose on each other, advertising spend on the site will decline.

Valuation

Two major analysts from Goldman Sachs and Merrill Lynch assigned a $30 and $41 price target, respectively. At the mid-point of $35.50, IQ stock still has upside of around 38 percent (source: Tipranks).

Takeaway

The volatility in IQ stock will likely continue as uncertainties over China’s prospects worsen. The outcome of the trading war is not predictable, so iQIYI may only continue its business as usual.

As long as subscription growth holds and the company continues to convert active users to members, profits will grow at a healthy rate. Eventually, IQ stock will be too cheap to ignore and investors will resume buying its shares.

Disclosure: The author does not own shares in any of the companies mentioned.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/iq-stock-worth-look/.

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