Iqiyi (NASDAQ:IQ) has been a public company for 15 months. In this period, IQ stock has gone as high as $40 and as low as $15. Trading right at its March 2018 IPO price of $18, investors continue to wonder in which direction it’s headed next.
I’m a firm believer that you can often buy IPO shares for less than their pricing within 12-24 months of a stock going public. IQ stock is no different.
It was already available at sub-$18 prices last December. Barring some excellent news, it’s likely to test $15 between now and the end of the year. The wildcard is a trade deal. If that happens, I doubt you’ll be able to pick up iQiyi stock anywhere near $15. More likely it heads into the mid-$20s on the news.
When I last wrote about IQ stock at the end of May, I recommended to investors that they not buy iQiyi until it drops below $18. I still feel that way. Here’s why.
The Risk/Reward Has Got to Be Right
Although I like the fact that the video-streaming service has four revenue streams: membership services, advertising, content distribution, and live broadcasting/online games, the fact that it lost $270 million in the first quarter compared to $59 million a year earlier suggests the risk of owning IQ stock is high.
If you’re going to own it, you need to be compensated for taking on the extra risk compared to buying Netflix (NASDAQ:NFLX) and calling it a day. Since it doesn’t pay a dividend, that compensation has to come by way of a lower share price.
As I explained at the end of May, the company’s membership services accounted for 49% of its Q1 2019 revenue with advertising adding another 30% and content distribution, live broadcasting, and online games chipping in the remaining 21%.
While it’s got a nice balance of revenue streams, membership services are clearly the one that will drive iQiyi to profitability.
So, in addition to being rewarded for taking on additional risk, investors need to evaluate whether the 64% increase in membership services revenue in the first quarter has the company headed in the right direction.
Is it earning more revenue per paying customer?
In Q1 2019, iQiyi had $513.4 million in membership services revenue from 95.4 million paying members. That’s $5.38 for each paying member.
In Q1 2018, it had $334.0 million in membership services revenue from approximately 60.4 million paying members for an average of $5.53 a customer.
The fact that it has fallen slightly isn’t a problem. As it continues to grow the number of paying members, the fees it charges will remain steady to attract new members and retain existing ones.
Then, like Netflix, it will raise the amount it charges customers once it’s got them hooked. As long as it’s growing members by 60% each quarter, it will ultimately lead to consistent profitability.
The Bottom Line on IQ Stock
Anytime you consider buying a money-losing stock; you’re taking a gamble. Heck, anytime you buy a moneymaker, you’re taking a risk.
If you’re an aggressive investor, I might buy at $18, and buy more should it drop to $15 or below.
If you’re risk averse, I’m not sure you want to be buying stocks of companies that aren’t making money. Investing is tough enough without a margin of safety.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.