IQiyi Stock Should Be on Your Christmas List

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IQ stock - IQiyi Stock Should Be on Your Christmas List

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It has been a rough ride this year for Chinese video streaming company iQiyi (NASDAQ:IQ) as trade war concerns, competition and volatile market conditions all weighed on the firm’s valuation. However, at under $20 per share, it might be time to think about getting greedy. IQ stock is by no means a sure bet — the firm is carrying a lot of risk no matter how you slice it — but for investors with a strong stomach it could end up delivering impressive gains when sentiment turns around for Chinese stocks.

Risks Worth Noting in IQ Stock

Chinese stocks have been hammered over the past few months, and rightly so — the Chinese economy looks shaky right now as the U.S.-China trade war continues to drag on. Even the recent cease-fire is only that so far — a cease fire, not a cessation.

In order to cope with the impact that trade tension has had on the economy, Beijing has started to devalue its currency and many analysts see more of that on the horizon. So as my colleague Vince Martin pointed out, even though IQ isn’t depending on sales to U.S. consumers, the devalued yuan makes the firm’s profits less valuable to U.S. investors. 

Plus, IQ isn’t exactly alone in its quest to deliver streaming services to China’s massive population. It’s battling against powerhouses like Tencent Holdings (OTCMKTS:TCEHY) and Alibaba (NYSE:BABA), which both run their own streaming platforms. 

Finally, IQ hasn’t turned a profit yet and the company’s disappointing Average Revenue Per User (ARPU) comes in at around $5.60 per quarter. That makes an investment in IQ stock a risky prospect — the firm has been burning through cash in an effort to expand its content library and take on new users. There’s a chance iQiyi will never get it together and that the stock could dive-bomb toward 0 over the next few years. The chances of that scenario playing out are relatively low, but it’s worth noting the possibility.

So Why Buy iQiyi?

With all those negatives on the table, you can see why IQ stock has lost some of its shine over the past six months. However, IQ has lost more than just some of its shine — the stock more than halved its value in just five months which, in my opinion, has created a buying opportunity.

It’s not all doom and gloom for IQ. In fact, I believe the future looks rosy for the Chinese streaming service. The company’s inability to turn a profit is understandable when you look at its growth strategy.

When it comes to streaming, content is king — just look at Netflix (NASDAQ:NFLX). Netflix has been able to survive mounting competition from big-wigs like Amazon (NASDAQ:AMZN) because NFLX subscribers are hooked on the firm’s original programming. That content cost Netflix a pretty penny to create, but it’s what keeps people from abandoning their subscription. 

IQ is working on building out a streaming platform the same way. The firm’s drama The Story of Yanxi Palace set viewership records and it was responsible for more than half of the country’s top 10 original internet dramas last year.  So, although the company’s ARPU is less than desirable, it won’t stay that way forever. Plus, subscriber growth has been solid so far, a good sign that iQiyi is carving out a solid foothold in China’s streaming market.

Room for Everyone at the Table

The other major worry when it comes to IQ’s future is competition from Tencent and Alibaba.

Don’t get me wrong, going up against heavyweights like those is no easy feat, but concerns about IQ’s ability to stay in the game could be overdone. If the U.S. market is any indication, there’s room for more than one streaming service in most households.

That’s the argument Disney (NYSE:DIS) made when defending its own plans to expand its streaming services, and the Mouse is right. Most households that use streaming services subscribe to an average of three different platforms, suggesting that it’s not a winner-take-all industry. China’s streaming market is still in the early stages, but we can expect it to follow a similar pattern to that in the U.S.

The Bottom Line

So, although IQ stock certainly carries some risk, its future looks bright — or at least brighter than the market is giving it credit for. But the biggest reason to snap up IQ now is the market’s wider view on China.

Right now Chinese stocks have yet to recover from worries about the economy. Yes, that’s a valid concern but I’d say the hammering that iQiyi has taken is overdone. Not only is IQ’s business likely to survive a recession — people will probably still spend on streaming entertainment — but sentiment will eventually turn around for Chinese stocks because you simply can’t ignore the long-term growth story that the country presents.

The big picture for Chinese firms looks bright. We’re talking about a massive country with more than a billion people. It represents a huge opportunity for growth, especially on the digital front. Yes, there are some rainclouds hanging over the short-term growth narrative for Chinese firms like IQ, but if you can wait out a bit of turbulence it’s worth keeping an eye on the long-term growth potential that the country is offering.

Until sentiment on Chinese stocks improves, IQ is unlikely to make its way back above $40 per share. However, as long as the company continues to deliver solid user growth and premium content, I don’t think it’s unreasonable to expect the stock to regain momentum and make its way toward $30 per share in the new year. 

As of this writing, Laura Hoy was long NFLX and AMZN. 

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2018/12/iqiyi-stock-should-be-on-your-christmas-list/.

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