iQiyi (NASDAQ:IQ) may have gotten off on the right foot following its IPO from late March, with the price of iQiyi stock almost tripling by mid-June. The advent of a tariff war right around that time, however, ultimately wiped away all of that gain by late last year. Many feared the subsequent economic headwind created in China would work against the so-called Netflix (NASDAQ:NFLX) of China.
At least some investors have changed their tune in the meantime. While still miles away from its June peak above $46, the iQiyi stock price has snapped back from its early January low near $14 to more than $22, and is still chugging along.
The prod, or prods, for the rebound effort thus far aren’t perfectly clear. iQiyi has stepped up its deal-making, and undoubtedly has added more subscribers. It’s also, most likely, shored up ad revenue… an area that gnawed at investors following the company’s third-quarter report. And, if nothing else, it’s become increasingly clear China’s economy, though slowing, isn’t imploding. All could be contributing factors to the rebound.
Whatever the case, today’s fourth-quarter report will certainly stir the pot again, either affirming or disproving the bullish assumptions that have developed in recent weeks.
iQiyi Earnings Preview
As of the most recent look, analysts were calling for a per-share loss of 71 cents for the recently ended fourth quarter, on revenue of $983 million. The company had previously suggested revenue would roll in somewhere between $943.5 million and $982.8 million for the quarter ending in December (between RMB6.48 billion RMB6.75 billion), although fluctuation in exchange rates makes all those outlooks a moving target.
In its third quarter of 2018, revenues of $1 billion (RMB6.9 billion) were up 48% year-over-year, though the net loss of $457.3 million (RMB3.1 billion) nearly tripled from the Q3-2017 loss of RMB1.1 billion. Per share of iQiyi stock, the third quarter loss of 63 cents also widened year-over-year as the company ramped up spending in the name of growth.
The losses, however, are the least relevant part of the story right now. Far more important are the total number of paying subscribers, and how much of its revenue is driven by ads.
To that end, iQiyi ended the third quarter with 80.7 million members, nearly doubling its headcount of 42.7 million as of the third quarter of 2017. The company will need to sustain that sort of subscriber growth pace to satisfy shareholders.
As for the revenue mix, a key factor in the 11% plunge iQiyi stock suffered immediately following its third-quarter print was the 4% decline in advertising revenue. While subscription revenue growth more than offset that lull, in that ad revenue accounts for a little more than one-third of the company’s business, investors were understandably concerned.
The revenue mix will be a closely watched matter with the fourth-quarter report as well.
Still a Work in Progress
Indeed, though it’s often referred to as the Netflix of China, the fact that advertising revenue is such an important part of the revenue mix — and the rhetoric — makes it clear iQiyi is just as comparable to Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) property. iQiyi is also a content distributor, which drives roughly one-tenth of its revenue.
The company enjoys the same benefits and suffers the same headaches its rivals do on all three fronts face.
Case in point: Like its U.S. counterpart Netflix, the race to become the king of content before others get a chance to do the same is an expensive one. In early December, iQiyi issued $750 million worth of convertible debt, largely to create or curate video entertainment.
While not dilutive yet, should all of that debt be converted into iQiyi stock, it could crimp per-share results.
It may well be worth the ramped-up spending on content though, as its original programming like crime drama Burning Ice and quirky I, Actor are proving to be draws. As is the case with Netflix and YouTube’s originals, owners of IQ stock will be forced to weigh the long-term benefits of such spending against the short-term cost.
Perhaps far more important in today’s numbers, however, will be the near-term impact of initiatives meant to rekindle revenue growth here and now.
One of those initiatives is a partnership with China Mobile’s MIGU, which is the wireless telecom carrier’s steaming music and video app. The partnership facilitates cross-selling of one another’s services.
Also of interest will be the impact of the company’s launch of an in-room virtual reality experience in select hotels in China. Though it’s unlikely to have made a meaningful dent in sales or revenue, the initiative lays the groundwork for future growth. The company’s partnership with Ctrip.Com (NASDAQ:CTRP) has also recently been expanded, and just last month iQiyi unveiled a program that will pipe short-form video, and ads, into China’s metro system stations.
While such partnerships are relatively new to iQiyi, they’re likely to become key growth drivers in the foreseeable future. Investors would be wise to listen for any insights about these plans during and after the earnings conference call, even if their current upside is modest
Looking Ahead for iQiyi Stock
Although analysts handicap the company’s quarterly results and iQiyi reports them, it’s effectively only a courtesy at this stage. The Netflix (and YouTube) of China is almost certainly going to continue booking unpredictable losses for the foreseeable future, and were it not for iQiyi’s given revenue guidance, top-line estimates would be mostly unpredictable as well.
The fiscal metrics aren’t really the hot button for investors right now, however.
The much bigger driving force behind the price of iQiyi stock is membership growth and its revenue mix. The market wants to see all three revenue-bearing arms make forward progress, and it wants to believe recently forged and future partnerships will bear fruit.
The fact that IQ stock has rallied more than 50% from its early January low headed into Thursday’s fourth quarter report also tacitly suggests investors are ready to see the glass as half-full again.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.