Here’s the Reason I’m Not Buying the IQ Stock Discount

Although it looks attractive now, iQiyi stock is likely failing due to narrowly focused content

We haven’t even hit the halfway point of this year, and iQiyi (NASDAQ:IQ) is already exhibiting rollercoaster-like behavior. In the first two months of 2019, the IQ stock price gained over 78%, turning embattled stakeholders ecstatic. However, the mood quickly soared shortly thereafter. Right now, shares are up 48% — a great haul, but no 78%.

iQiyi content not good enough for IQ stock
Source: Shutterstock

Even worse, iQiyi stock has shown no sign of returning to its former glory. Part of that volatility has a very clear-cut explanation: after a noticeable thaw in U.S.-China relations, President Trump ramped up tariffs on Chinese-made goods. In turn, the world’s second-largest economy promised to retaliate. Not only did iQiyi fall, but so too did compatriots Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), and many others.

But in the case of the IQ stock price, the value drop presents a confusing look for investors. On one hand, Chinese companies look like names to avoid at this immediate juncture. On the flipside, contrarians may view this as an opportunity to grab a viable growth firm on the cheap.

I can appreciate the temptation. As the Chinese population grew in both size and wealth, Hollywood, along with every other industry saw dollar signs. And it’s no understatement that Chinese moviegoers and content consumers have kept the lights on at many studios.

That fact alone bodes well for iQiyi stock. As a content producer for the world’s largest market, IQ stock should veritably moon.

Still, IQ stock languishes. Outside of speculative trading, I’d stay away from this company. Here’s why:

Narrow Focus Hurts IQ Stock

Theoretically, iQiyi stock has a bulletproof-business plan: sell Chinese entertainment to Chinese people. In reality, the situation is much more complex. You only need to look at the technical charts to realize this.

But why, with a billion-plus audience base, is the IQ stock price failing? This is a simple, but underappreciated risk factor: audiences are incredibly fickle and difficult to predict.

Let’s look at The Great Wall, a somewhat-controversial film that represented a joint effort between U.S. and Chinese movie studios. As you may know, the entire film centered on China and Chinese folklore. It also featured a heavy dosing of Chinese actors. The one rub was that Matt Damon starred in the film rather than a Chinese actor. Eventually, the movie would go on to bomb at home and abroad.

Meanwhile, another U.S.-China co-production, The Meg, featured similar problems: an Asian-led research facility needs help, and the “white savior” archetype provides it, while also getting the (Asian) girl. The film featured almost all the tired, unoriginal stereotypes about Asians.

It was a massive box-office success both here and in China.

This strange dynamic tells me a lot about Chinese audiences, and by logical deduction, iQiyi stock.

The Chinese want entertainment, and Hollywood knows how to deliver, not just in China, but in the rest of the world. Thus, I find iQiyi’s near-exclusive focus on China as a liability, not an asset.

Financial Metrics Say Everything about iQiyi Stock, Unfortunately

Quarter-to-quarter, IQ stock’s revenue growth is no longer impressive. More worryingly, the company’s net-income losses have widened significantly over the same span. If they want to right the ship, they must produce content that appeals universally.

Ultimately, I think the mistake that investors are making with iQiyi stock is assuming the “China factor” has clout. It does, but it’s not the main dish. You still must produce compelling content, compelling enough for viewers to open their wallets. That’s not happening, which is why I’m avoiding this name.

As of this writing, Josh Enomoto is long AMC.


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/heres-the-reason-im-not-buying-the-iq-stock-discount/.

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