This is going to be an unconventional take on IQiyi (NASDAQ:IQ), so you’ll want to prepare yourself. You’ll laugh and you’ll cry, but after reading this column, you probably won’t buy IQ stock.
When I previously covered the content-streaming company this summer, I went through a laundry list of reasons to avoid it. Analysts often label iQiyi as the Netflix (NASDAQ:NFLX) of China, and at first, the comparison seemingly makes sense. IQ boasts 126 million daily active users on its mobile platform. Plus, its monthly active user count exceeds 421 million, or more users than the total population of the U.S.
But look deeper underneath the hood, and the outlook for IQiyi stock becomes less rosy. A major problem for the bullish thesis on IQ stock is that IQ has relatively few paying subscribers. The vast majority of iQiyi users select the free option, which is saturated with advertisements. As I noted in my previous column, the company only has a pedestrian 66 million paid subscribers.
IQ’s financial results are also problematic. IQ stock bulls say iQiyi stock is a pure growth investment. Certainly, IQ’s growth is very impressive. In 2017, the company’s annual sales jumped over 62%. This year, it’s on pace for 32% growth.
But the company’s bottom-line losses are increasing dramatically. Last quarter, it lost RMB2.6 billion, up from RMB1.1 billion during the same period a year earlier. I get it: iQiyi is making sacrifices now so that it will be a massive contender later. But bleeding cash isn’t exactly ideal for IQ stock, especially because the company is going up against powerhouses Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY) in the streaming sector.
But as InvestorPlace’s Laura Hoy emphasized, “When it comes to streaming, content is king.” IQ offers a library of compelling content to nearly 1.4 billion people.
That should seal the deal for IQ stock, right? Well, not quite.
IQ Stock And Eskimos
On the surface, China’s massive population should make IQ stock a gold mine. Inevitably, the Asian country will become the biggest film market in the world. However, the awful weekend debut of Crazy Rich Asians in China should make everyone think twice.
Pop-culture pundits have floated explanations for why the landmark movie, which features an exclusively Asian cast, bombed in China. I’m just going to get to the heart of the matter: “Asian movies” don’t do well in Asia.
It’s the age-old selling ice to an Eskimo dilemma. Imagine that you’re a Chinese tourist coming to America for the first time. Chances are, you’ll want to try classic American food, such as a New York pizza, or a Philly cheesesteak.
You probably won’t clamor for lo mein or Kung Pao chicken. To us, it’s Chinese food. In China, it’s just food. In the same way, the Chinese didn’t understand the hoopla surrounding Crazy Rich Asians.
To us, Crazy represented Asian Americans breaking the bamboo ceiling. In China, the movie just showed actors doing their jobs.
Put another way, the Chinese aren’t interested in seeing more “of their own.” For instance, social critics blasted The Great Wall and Matt Damon indirectly for starring in a movie about 11th-century China. But here’s the ugly truth: if Damon wasn’t cast in the lead role, no one in China would have watched the film.
The same phenomenon can be seen in the shopping habits of China’s burgeoning middle class. Are middle-class Chinese citizens buying Chinese goods? Nope. They’re buying Italian clothes and German luxury cars. Many Chinese people in particular and Asians in general admire the West. No one crowned Yao Ming as an elite basketball player until he played in the NBA.
The difficulty for iQiyi and iQiyi stock is that its content is mostly Chinese. That’s fine, but that’s not what its customers want.
The Color of Content Dooms iQiyi Stock
In so many ways, this is a frustrating and perplexing situation. To do the topic justice would require extensive sociological context that goes beyond this article’s scope. But the bottom line is this: you can feed consumer demand or you can go out of business.
Obviously, Alibaba has chosen the former. While Alibaba Pictures produces and distributes several China-specific films, it also invests heavily in Hollywood blockbusters. These flicks, like Mission: Impossible – Fallout, may hire a token Asian actor. But by and large, Alibaba’s English-language films are white films, which is how the Chinese like it.
From that perspective, IQ stock is a losing proposition. Ironic as it sounds, iQiyi has a diversity problem. Unless it changes course, it will be stuck trying to sell ice to Eskimos.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
