Now Is the Time to Buy and Hold IQ Stock on Weakness

IQ stock should weather the current troubles and bounce back

IQ Stock

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Iqiyi (NASDAQ:IQ), a Chinese video streaming platform service, has seen quite a bit of action since coming public in late March. On the debut, the shares fell nearly 14%. Then buyers came in and boosted IQ stock to a high of $46.23. But alas, it would not hold. IQ would eventually fade to about $25. Still, it is a respectable 39% above the initial offering price.

So yes, iQiyi stock has been a gift to quick-action traders. But what about those who take a longer view on things? Is now the time to think about making a purchase?

Well, I think a reasonable case can be made. First of all, it’s important to note that IQ is not a dicey early-stage operator. The company is actually a spin-off from Baidu (NASDAQ:BIDU), which is the leading player in online search in China. This relationship has certainly been critical in providing massive distribution and access to talented engineers.

Next, the financials are at impressive levels. In the latest quarter, revenues jumped by 51% to $932.5 million. And, although losses  continue, they are to be expected as part of the growth ramp. Besides, the company has $2 billion in the bank.

IQ Stock and Scale

As seen with the huge success with Netflix (NASDAQ:NFLX), a critical factor is building a huge user base. It allows for economies of scale, network effects and data advantages.

Regarding IQ, it has 67.1 million subscribers, up 75% on a year-over-year basis. This impressive in light of the fierce competition in the Chinese market, which include mega rivals like Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY).

Here’s how Jefferies analyst Karen Chan puts it: “Although iQiyi’s paying subscriber base of 67 million already surpasses that of Netflix domestically, conversion is still at early innings.”

She has a $33 price target on IQ stock, which represents 35% potential upside.

A key to the growth rate in the subscriber base is the focus on premium content offerings, which involve drama series, variety shows, animations, short-form films and original films. As a testament to the quality of the offerings, the company recently won 11 awards for original titles at the Shanghai International Film and TV Festival.

What’s more, IQ has been getting more traction licensing its original content, which could ripen into a nice revenue stream. Some of the titles that have attracted attention include With You, Summer’s Desire, My Huckleberry Friends, and the 200 Million Years Old Classmate.

And yes, IQ has a fairly good track record of creating breakout hits as well. The latest came in July, called “Story of Yanxi Palace.” It has already logged a staggering 15 billion video views.

Bottom Line on the IQ Stock Price

There are some technical considerations with IPOs. Perhaps the most important is the expiration of the lockup provision. This comes after six months from the offering and allows insiders to begin selling their holdings.

No doubt, this has been a factor in the weakness in IQ.  It’s lockup expiration came on September 25th.

In the meantime, there has been a continued slide in Chinese stocks as well. There remains considerable uncertainty regarding the trade tensions between the US and China.

Yet for IQ stock this should have only a muted impact. The company is mostly focused on the domestic market. More importantly, it is benefiting from powerful secular trends in China.

So all in all, there will remain volatility. But given the recent fall and the general negative sentiment with Chinese stocks, the timing does look reasonable for IQ stock right now.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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