The Netflix of China: 3 Things to Watch with IQ Stock

Here's what to know before you buy IQ stock

iq stock - The Netflix of China: 3 Things to Watch with IQ Stock

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While Chinese streaming company iQiyi (NASDAQ:IQ) is regularly compared to the high-flier Netflix (NASDAQ:NFLX), its stock has been more or less moving sideways since mid-June. But since that early summer high, the company has reported earnings and made numerous moves worth paying attention to.

With IQ stock at an apparent standstill, here are three things investors should be keeping an eye on.

3 Things to Watch in IQ Stock

1. Expenses. On July 31, iQiyi reported earnings, posting a 51% year-over-year increase in revenue and a 75% increase in members. “Supported by our vast library of premium content, and the premiere of a series of highly popular self-produced content, our membership and advertising businesses both generated robust growth during the quarter, with the total number of subscribing members reaching a new record high,” the company’s CEO and founder Dr. Yu Gong said in the earnings release.

And yet, the company’s net loss more than doubled year-over-year and was worse than the consensus estimate. The cost of revenue was over 6 billion yuan — up from 4.3 billion yuan the year before. This is common for up-and-coming companies on the path to economies of scale. But the question with iQiyi, as it was previously with companies like Amazon (NASDAQ:AMZN) and Netflix, is how long investors are willing to wait for profits.

Speaking of expenses, iQiyi also just filed a lawsuit, worth 30 million yuan, for unauthorized streaming of its show The Story of Yanxi Palace. While that could provide a windfall for the company down the line if the litigation goes as hoped, it’s going to rack up costs short-term.

2. Expansion. The good news is that the company at least has some progress to show for its spending. iQiyi continues to expand its offerings; about a month ago, it closed an approximately $300 million deal to acquire a game developer called Chengdu Skymoons. Before that, it was pushing into actual brick-and-mortar movie theaters as a destination for streaming its content. Along the same lines, the company has also inked a deal with Air New Zealand to offer premium content on its in-flight entertainment system.

3. Expectations. Of course, there are always two layers to analyzing an investment: what’s going on at the company — like the expenses and expansion we’ve covered already — and what Wall Street expects from the company. Numerous Chinese companies have had a slow summer and the sideways movement, in my opinion, has largely reset expectations for iQiyi.

For IQ stock, investors need to balance the risk that comes from investing in China and from a company racking up higher and higher costs with the opportunity that comes from the market and iQiyi’s attempt at media dominance. Expenses have long been a concern for Netflix investors too, yet the company has continued to defy the doubters and climb.

I think this slow summer actually provides a nice foundation for IQ stock to get moving higher again — and that its new investments will show up in the bottom line in due time. But investors should continue to keep a close eye on these three factors to make sure the company’s expenses are being directed towards area with substantial upside.

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

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