iQiyi (NASDAQ:IQ) stock is continuing to slide. The China-based provider of streaming content has declined tremendously since the summer. If IQ stock continues to drop, it could revisit or even fall below its 52-week low.
However, declines often create opportunities. Given the retreat of IQ stock, IQ’s recession-proof business model, and the company’s opportunities, Wall Street should take another look at IQ.
The Decline of IQ Stock Could Create a Buying Opportunity
In previous columns, I urged investors not to view IQ stock as a second chance to enjoy the gains of Netflix (NASDAQ:NFLX) that they might have missed. In the wake of my warnings, the IQ stock price has fallen by more than 55% since reaching $46.23 per share in mid-June.
The ongoing U.S.-China trade war, not weak viewership or revenues, has caused the retreat of IQ stock to continue. The shares now trade at lows not seen since soon after the company’s initial public offering. On the surface, the decline of IQ on worries about the trade war makes little sense. After all, workers who lose their jobs due to a trade war would logically spend more time on a site like IQiyi.
Although we don’t know how far IQ will fall from here, I can see a possible buying opportunity beginning to emerge. IQ trades at around 4.75 times its sales and 4.6 times its book value, well below the levels of other Chinese stocks such as Weibo (NASDAQ:WB) and Tencent (OTCMKTS:TCEHY).
Many Possible Catalysts Could Turn IQ Stock Around
IQ won’t stop declining until certain behaviors or events change. First of all, the IQ stock price probably has to fall further before a significant number of investors become interested in buying the shares again. As my colleague, James Brumley, pointed out, the volume of IQ trades has steadily fallen. Even the end of the IPO’s lockout period did not spark an increase in volumes. For this reason, I would not expect IQ stock to encounter much downside resistance until the shares at least reach their 52-week low of $15.30.
Furthermore, a termination of the U.S.-China trade war would obviously be very bullish for IQ. As I previously mentioned, a resolution of the conflict will not have a positive, direct effect on IQ’s revenues. But investors should probably assume that traders will bid IQ higher if a U.S.-China trade deal is made.
iQiyi’s business model is often described as a hybrid of the business models of Netflix and YouTube, which is owned by Google parent Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG). However, that model has made IQ stock dependent on consumers who utilize the site for free. These viewers do enable IQ to obtain revenue from ads.
Still, iQiyi is now saddled with Netflix-like costs and a business model that does not generate profits that are similar to those of NFLX. Almost all of YouTube’s videos are available for free., but to see certain content, consumer must pay for YouTube Premium. Conversely, all of iQiyi’s programs can be viewed for free. By emulating YouTube’s approach, iQiyi could increase its revenue, boosting iQiyi stock.
While I do not think the decline of IQ is over, I think it has reached the fourth quarter. Once a positive catalyst appears, or a meaningful number of traders believe that IQ stock has reached a floor, I think it will be time to take a chance on IQ stock.
Final Thoughts on IQ
Investors should not buy IQ yet, but I believe a catalyst could send the shares meaningfully higher.
iQiyi stock trades at a lower price-to-sales ratio and book value than many of its Chinese peers. In addition, the trade war will not negatively affect IQ’s viewership or revenues.
Given the large decline in IQ and its growth potential, the time has come to again pay attention to IQ stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
