IQiyi (NASDAQ:IQ) stock has been rising from the dead, or at least it feels that way. I bought into IQ stock shortly after the company went public at the end of March and sold my holdings (despite believing in the long-term story) after shares exploded higher, running from an IPO price of $18 to almost $50 in less than 10 weeks.
I sold those shares based on the stock’s irrational exuberance, which helped push shares higher as iQiyi was touted as the Netflix (NASDAQ:NFLX) of China.
In reality, it’s more like China’s Netflix and YouTube, the latter of which belongs to Alphabet (NASDAQ:GOOGL). Have no fear though, I am far from perfect here. I did not buy at the IPO and in fact, had never heard of IQ until I did some research on the name before many others took notice. Sometimes it’s better to be lucky than good.
I gobbled up some shares at $20 a piece after a successful breakout and retest of that level, then sold in the upper $30s. I did not hit a double, nor cash out at the highs. Eventually, I bought back in at the mid $20s because, again, I believe in its long-term story and had already made a handsome profit in iQiyi stock. In other words, I could afford to sit through some volatility and short-term pain, and while I wish I had initiated my new position later below the $18 IPO price, it shows there’s always a lesson to be learned.
With that preamble in the books, just why do we like the fundamental story with IQ stock so much?
Valuing IQ Stock
Right off the bat, it should be pointed out that iQiyi will report fourth-quarter earnings after the close this afternoon (along with China compatriot Baidu) Analysts currently expect the company to lose 71 cents per share on sales of ~$983 million. Keep in mind that last quarter (reported on Oct. 30), IQ badly missed earnings estimates, which called for a loss of 38 cents per share. Instead, the company reported a loss of 63 cents per share on in-line revenue results.
The bad news? The Chinese media giant has had a hard time impressing the market with its earnings. What I mean by that is that the IQ stock price has come under pressure more often than not following the company’s quarterly results.
From a bottom-line perspective, IQ is clearly lacking. From a growth perspective though, boy is it impressive. IQ grew revenue 48% year-over-year last quarter and saw 89% user growth to 80.7 million people. Keep in mind, Netflix is up near 135 million users but has nowhere near this growth right now. Further, Netflix isn’t allowed in China, where IQ operates.
For the year, analysts expect $3.64 billion in sales and are looking for $4.77 billion in current fiscal 2019. Users should easily eclipse 100 million this quarter. Put simply, the growth here is staggering, even if the profits are not. Keep in mind though, the long-term story with Netflix was similar: user growth trumped profits — and to an extent, still does.
There’s also the trade war to consider. Working in IQ stock’s favor now, positive deal headlines are giving a bump to Chinese equities. Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), Baidu (NASDAQ:BIDU) (which is flirting with a breakout too), along with the IQ stock price, have all gravitated higher as a result. A new deal will remove a huge overhead for these names. But before this positivity, remember how bad the tariff and trade news was for Chinese equities — IQ stocks included. Negative rhetoric can work against it too, so be aware of that potential risk.
Trading IQ Stock Price
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The rally over $18 in January — flagged here — was a big-time buy trigger. It put IQ stock over downtrend resistance and the 50-day moving average, and was the spark behind this $4.50 per share rally from that point.
However, if you are only trading and don’t want to carry earnings risk, consider booking some or all profits before the report. On a poor reaction, I want to see $20 hold as support. That would represent about a 10% decline from current levels. Worst case, I want to see the 50-day moving average hold as support. On a further rally, look to see if iQiyi’s stock price can work its way up to $25.
Shares have finally broken out of that nasty downtrend and are breaking out to the upside as we speak. The only question is whether earnings will pour gasoline or cold water on the fire.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long GOOGL and IQ.
