Shares of iQiyi (NASDAQ:IQ) started out trading with a bang, but have been a dud ever since. Referred to as “the Netflix (NASDAQ:NFLX) of China,” IQ stock went public in May at $18. And IQ stock price doubled in about two months. However, those gains evaporated though as the trade situation between the U.S. and China worsened throughout the summer.
But an interesting thing has happened. While most other tech stocks have been weak this month, IQ stock has actually held up pretty well — relatively. Not that it’s been an exception to the carnage over the last two months — IQ stock price fell from $26 to $19 — but just that investors are seeing a few dim rays of hope.
Buy iQiyi Stock on Fundamentals?
Most Chinese tech stocks have been under pressure, which many attribute to the trade war between the U.S. and China. However, the reasoning doesn’t make that much sense. How do higher import tariffs impact a streaming video service over in China? They don’t really.
iQiyi is essentially a combination of Netflix and Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube. It relies on monthly subscriptions as well as ad-based video consumption. So in the same way that YouTube and Netflix and unaffected by the trade war with China, so too is iQiyi.
As for iQiyi stock though, there seems to be a widespread selling in the Chinese stocks. Whether it’s Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), Baidu (NASDAQ:BIDU) IQ, Sogou (NYSE:SOGO) or others, they’ve been under pressure. Like any other stock, they each have their flaws, but at what point is enough enough?
In regards to IQ stock, the company continues to lose money in lieu of growing its subscriber base. Last quarter iQiyi came up short on earnings and reported in-line revenue results, which grew almost 50% year-over-year (YoY) to roughly $1 billion. But how can investors ignore the fact that subscribers grew 89% YoY to 80.7 million? That’s not far behind Netflix’s ~130 million subs given IQ’s growth.
Analysts still expect iQiyi to lose $2.35 a share this year and another $1.36 per share next year. While profits would be nice, in order for a platform like iQiyi to succeed it needs to invest. It needs to build its subscription base like Netflix did and then look to the bottom line. Keep in mind, companies like YouTube and Netflix aren’t allowed in China, so IQ isn’t competing against them. Given that the country has four times the population of the U.S., there’s plenty of long-term upside for iQiyi.
Trading IQ Stock
Worth pointing out is that IQ stock has a lower valuation than Netflix and a healthier balance sheet. In fact, iQiyi carries less than $300 million in debt, not bad for a high-growth company.
In any regard, how do the charts look?
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One could say they looked mixed and that would be optimistic. The truth is, IQ stock price has been under tremendous pressure since summer. The good news is that iQiyi stock is holding up over $20 — or at least it was until this morning. We need to see IQ stock price back at $20, and then see it IQ move over the 21-day moving average.
If the 21-day continues to act as resistance and if there is no improvement on the trade front, I would expect $20 support to give way for good. If that’s the case, another test of downtrend support (blue line) is likely, putting IQ stock price down near $16 to $17. Although, it’s possible its $18 IPO price acts as support too.
Above the 21-day moving average and downtrend resistance is in play just above $23. That coincides with the 50-day moving average as well. I would expect this to act as resistance, at least on its first test. Still, that’s good for a more-than 10% rally.
If IQ stock can eventually get above this level, a more prolonged move higher could be underway.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long IQ.
