IQiyi (NASDAQ:IQ), the online streaming and entertainment company based in Beijing, offers investors the enticing possibility to invest in the growing Chinese consumer economy. This possibility made iQiyi stock (and many other Chinese stocks) a darling among investors.
This also meant that for a time, many investors ranked iQiyi stock among the best stocks in the market …
That is until an escalating war of words led to the start of various tariffs between China and the U.S in 2018.
While analysts debate whether the volatility and general market selloff are behind us, I would like to discuss why I am getting ready to take another look at the favorable long-term prospects of IQ stock, a company that is referred to by many as the “Netflix (NASDAQ:NFLX) of China.”
IQ: A Young Company and a Recent IPO
IQ is a spin-off from China’s search leader Baidu (NASDAQ:BIDU). It initially was an ad-supported video-on-demand service. Then in 2015, BIDU partly adopted Netflix’s pay-for-content subscription model to China and started charging about $3 per month for original content. Following the growth of the service, Baidu decided to spin off the company and IQ had its IPO in March 2018.
IQ’s offerings include streaming video services, online games, graphic novels, as well as merchandise for sale. The company describes itself as “one of the largest internet companies in China in terms of user base.”
On Feb. 21, iQiyi reported earnings. Year-over-year sales were up 55% and reached $1 billion. Analysts cheered the double-digit increase in the numbers of subscribers that reached 87.4 million as of Dec. 31, 2018.
In addition to the subscription model, iQiyi also generates almost half of its revenue from advertising. In fact, a significant majority of the estimated 1 billion monthly IQ viewers still use the free, ad-supported model as opposed to the subscription-based model. The number of active users is almost evenly split between users on mobile devices and viewers who prefer to access the platform on their personal computers.
In other words, IQ is still a high-growth company and I expect the next several earnings report to show that its revenue growth is around 40%. This growth in revenue is expected to trickle down to the company’s bottom line in the coming years.
What Could Derail IQ Stock?
However, one thing investors need to keep in mind is that iQiyi is not yet a profitable company. The IQ earnings results gave an operating loss of $483.5 million with an operating loss margin of 47%. Its management has underlined that as the company further invests in technology and builds content, the cost of revenue would be high, i.e., the company will not be profitable any time soon.
Analysts value iQiyi stock based on the expectation of continued high revenue growth, which would lead to future profits. Therefore, whenever Wall Street fears the company is failing to meet growth or expectations, the stock will get penalized.
In other words, long-term investors should be ready for daily price fluctuations as well as high volatility around earnings release dates.
For example, following its IPO, IQ went from $15.44 to a high of $46.23 (June 19, 2018). Then it saw a low of $14.35 on Jan. 2, 2019. Following the recent earnings release, the stock price went up by 20% and iQiyi now trades around $26.
In addition to stock-specific speculative moves, investors should consider the current global trade wars and the state of the Chinese economy. Recently, the International Monetary Fund (IMF) has warned that China, the world’s second-biggest economy, has been slowing considerably.
Markets suffer during times of uncertainty and in the coming months, I expect the IQ stock price to be a battleground between investors and traders. As a result, there might be a weakness in the IQ stock price in the near term that investors should anticipate. However, a potential cooling off in China shouldn’t get in the way of a sensible, long-term investing strategy.
Bottom Line on iQiyi Stock
Although iQiyi stock will likely reward long-term investors, it may continue to be volatile over the next few weeks. And I do not expect to witness a major favorable sentiment shift toward Chinese stocks. However, although short-term investors should expect daily price swings in the IQ stock, long-term investors may see any further price declines as opportunities to go long.
On a final note, Baidu still owns a controlling interest of almost 60% in IQ stock and about 20% of BIDU’s revenues come from IQ. Therefore, those investors who may not be ready to invest in IQ yet may also consider an investment in the BIDU stock. Such a move would give those investors exposure to iQiyi stock, too.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
