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3 Reasons to Exercise Extreme Caution When It Comes to iQiyi Stock

iQiyi stock has way more headwinds than you think

About a year ago, the stock of Chinese online TV and movie platform iQiyi (NASDAQ:IQ) was trading at about $40, but this would represent the peak. Since then, iQiyi stock has plunged to about $18, which is the same level the public offering was priced at back in March 2018.

iQiyi Stock IQ Stock Again Looks Like the Best Bet for China Bulls
Source: Shutterstock

IQ was a spin-off from Baidu (NASDAQ:BIDU), which is a Chinese-based search engine. And by the way, BIDU stock has had a much worse performance! During the past year, BIDU shares have gone from $273 to $110, putting the market cap at $39 billion. A big reason for this fall-off has been a rapid deterioration of the growth rate.

Then what now for iQiyi stock?  Is there a value her or should investors hold back?  Well, on the positive side, the market size for the company is enormous. Plus, as in the U.S., there is a secular trend towards streamlining in China and the emergence of 5G should be a strong catalyst.

While all this is encouraging, I still think investors should be cautious.

Here’s a look at three notable risks:

IQ Stock: Competition

iQiyi is often called the Netflix (NASDAQ:NFLX) of China, but this really is misleading.

First of all, unlike NFLX in the early days, IQ must deal with several massive competitors, which include Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY). These companies have tremendous brands, powerful technology platforms and extensive distribution.

As for IQ, it’s main partner, Baidu, is fairly weak right now. If anything, the company’s search business is getting disrupted from BABA and Tencent, whose WeChat property has over 1 billion users.

Next, IQ has a blended business model that includes subscriptions and advertising. Unfortunately, the advertising business has been coming under much pressure. Consider that, as the Chinese economy slows down, it has been easy for companies to cut back on these expenditures.

It also appears that IQ has not been effective in optimizing its ad monetization. This is actually perplexing since BIDU has much experience with this.

IQ Stock: Content

A big part of the strategy for IQ is to produce original content. No doubt, this comes straight from the Netflix playbook.

Despite this, producing content is often dicey. Even some of the premier studios, like Disney (NYSE:DIS), can produce huge flops.

Yet there is an added risk for IQ stock: government restrictions and censorship in China. Such things provide an added layer of risk to the content strategy.

Besides, original content is expensive. This helps to explain the spiking losses iQiyi stock has sustained. In the latest quarter, they came to a hefty $270.3 million, coming to 4.5 times the losses reported a year ago.

IQ Stock: Geopolitics

Of course, the trade dispute between the U.S. and China is taking a toll, and the situation is likely to get worse as President Trump has moved to increase tariffs. It also does not help that both sides seem far apart in terms of coming to some type of agreement.

The Chinese government has been taking aggressive actions, such as with lower interest rates and taxes, but the results have been mixed. Then again, trade represents a key part of growth for China. The tariffs are also stirring up much uncertainty, which will make it tougher for businesses to initiate capital investments.

Regarding iQiyi stock, the growth has already been decelerating. In the current quarter, revenues are forecasted to increase by 12% to 18%, which compares to 43% in Q1. For the most part, given the sluggishness in China, this slowdown may not be a temporary thing either.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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