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IQ Stock Breakout: Is It Time to Buy the Netflix of China?

IQ stock - IQ Stock Breakout: Is It Time to Buy the Netflix of China?

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Shares of iQiyi (NASDAQ:IQ) are starting to show some life after spending several quarters in the hurt locker. IQ stock has been off to a quick start this year, bolting higher by more than 24%. However, it’s still down big over the past three and six months, falling more 21.5% and 44%, respectively.

Last week though, iQiyi stock showed signs of breaking out, heaping some confidence on investors that the worst may be over. Is that the case and is IQ stock really breaking out? Perhaps.

While iQiyi remains a volatile name in the short term, I continue to like IQ because of its long-term potential. When you hear a company described as “the Netflix of China,” it certainly gets your attention. While Netflix (NASDAQ:NFLX) has its own issues, it’s hard to deny what it has done to the video content industry.

That said, Netflix isn’t allowed in China, which has allowed a company called iQiyi to blossom. Like Netflix, IQ doesn’t have the greatest financial situation in the world — it’s not Apple (NASDAQ:AAPL) or Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) — but it has incredible subscriber growth.

Evaluation IQ Stock

For starters, the entire Chinese equity market continues to feel pressure as economic data out of China signals concern and as the trade war wears on. It doesn’t matter that IQ stock is listed on the Nasdaq, as all Chinese stocks simply remain under selling pressure. So what does that mean for iQiyi?

In all truth, the trade war has very little to no direct impact on iQiyi’s business. The economic slowdown likely doesn’t help, but it seems like iQiyi at least has a defensible moat much like Netflix would during a recession. Again, this isn’t a positive catalyst, but all things considered, I would consider iQiyi in a better position than a number of other companies.

Earlier this month, Bernstein analysts slapped an underperform rating and a dreadful $11 price target on the stock. It feels like analysts and others are looking for this company to be on the brink of profitability and churning out positive cash flow despite still being in its early years. While the company may not be there yet, we have to realize that it needs a massive base of subscribers before it can really take flight. Those who are patient have the potential to reap big rewards from this one.

On October 30th, iQiyi reported its third-quarter results. A loss of 4.34 yuan per share badly missed expectations for a loss of 2.81 yuan per share and management needs to tighten up a bit in this regard. That said, revenue exploded 48% to 6.9 billion yuan (roughly $1 billion) while subscriber growth boomed 89% to 80.7 million.

Understand that iQiyi is not a perfect mirror of Netflix. However, it runs a subscription segment similar to Netflix and an ad-based model similar to YouTube. So while the subscriber growth is impressive, realize that it’s not all monthly paying subscribers. Consider that in its third quarter, Netflix had revenue of $4 billion and total subscribers of 130 million. Based on those numbers and NFLX’s now $148 billion valuation, it makes iQiyi seem too discounted at just $13.3 billion.

Trading iQiyi Stock

chart of IQ stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com

The fundamental situation still needs to be cleaned up to bring investors back in droves. However, the charts are shaping up to the point where bulls may not care about earnings or margins, they care about the breakout.

IQ stock has closed above downtrend resistance (black line) and the 50-day moving average for the first time since July. Even if this recent rally ends up fizzling out, just getting to this point is a positive development. If shares can hold up above this level and stay above short-term uptrend support (blue line), IQ stock could put together a rally up to the 100-day moving average.

While the charts are looking good right now, bulls must be careful. IQ stock has been incredibly weak over the past seven months. Should it lose this breakout zone and fall back below uptrend support, the December/January lows are back on the table. If that level fails, who knows where support will come into play next.

So how do we play? Investors can be long over uptrend support and flat if IQ stock falls below.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL, GOOGL and IQ. 

Article printed from InvestorPlace Media, https://investorplace.com/2019/01/netflix-of-china-iqiyi-stock-breakout/.

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