IQiyi (NASDAQ:IQ) stock has trended down for the last two months. The uncertainty brought about by the U.S.-China trade war has added to the pain. As a result, iQiyi stock has not gained the traction of many of its American tech counterparts.
iQiyi claims it wants to become more like Disney (NYSE:DIS). However, IQ must first overcome its near-term challenges before it can achieve a “Disney-like” status.
IQ stock still trades more than 50% below its highs of last June. In the last ten months, many Chinese stocks, even those like iQiyi stock which have little direct relationship to the U.S., have fallen significantly.
On Feb. 22, IQ stock rose by almost 22% after it reported its fourth-quarter revenue and earnings which beat analysts’ consensus expectations. However, since that day, it has steadily fallen back to the levels at which it was trading before the earnings announcement.
iQiyi Prefers Comparisons to Disney, Not Netflix
Many like to compare iQiyi to Netflix (NASDAQ:NFLX). However, Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube (at least when it actively developed more premium content) serves as a more accurate comparison. Unlike Netflix, YouTube and IQ depend on advertising revenue. The latter company, however, has decided it wants the public to think of it as China’s Disney.
But it will take decades to determine whether IQ can become the “Disney of China.” Most owners of IQ stock won’t hold their shares long enough to see IQ become like DIS, if it ever does.
For now, iQiyi needs to worry about turning a profit and then building an imposing content library. Both milestones will take large amounts of time and money, as IQ’s peers have already discovered. The tremendous expense of content has begun to weigh on Netflix, and Disney has a decades-long head start in the content-development realm.
Multiples, Overall Economy Will Drive IQ Stock for Now
Two other issues for IQ stock are economic cycles and the mood of investors. Traders ran up the value of Netflix even though it took years to achieve profitability.
The market has not shown the same patience for IQ. IQ stock trades at 3.4 times its sales and 6.2 times its book value. Few would call such multiples “outrageous.” Both multiples also come in well below the price-sales and price-book-multiples of Netflix. However, IQ stock has to deal with obstacles that Netflix did not face.
For one, the ADR status of IQ stock adds to its uncertainty. American investors cannot legally own iQiyi stock directly and have to settle for a proxy representing the company. Moreover, the economic expansion has reached its 11th year. Some think there’s a high chance of a recession. During recessions, investors become wary of all stocks with high valuations.
Also,the Chinese economy has declined in the wake of the trade war. If the U.S. and China finally work out an agreement, IQ stock would likely rise in the short term. However, traders have to remember that American investors trade IQ stock. If U.S. traders feel a recession will happen soon, they likely will not enable iQiyi stock to reach high multiples.
The Bottom Line on IQ Stock
Owners of IQ stock need to focus on the company’s near-term challenges, not whether the company can become the next Disney. It has already become apparent that IQ stock will likely not achieve Netflix-like valuations. However, iQiyi has not been as much like Netflix as many thought. Even IQ now says it wants to become more like Disney than NFLX.
However, it took decades to build Disney into the media empire it has become today. For now, IQ needs to worry about turning a profit while expanding its content library. The owners of IQ stock need to figure out if and when Wall Street will take the equity to higher levels. With its failure to achieve Netflix-like multiples and fears of a recession looming, now is likely not IQ’s time.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
