Despite the hype of being “the Netflix (NASDAQ:NFLX) of China,” there has been no love for iQiyi stock (NASDAQ:IQ).
Netflix went from a market cap of less than $50 billion at the start of 2016 to more than $160 billion now. That’s a three-year triple — and not including the fact that entering 2010, its market cap was about $3 billion. Jeez, did most of us miss an opportunity or what?
That’s exactly why I’m perplexed with the underperformance of IQ stock. It’s like another opportunity to invest in Netflix from an early start. Granted iQiyi stock has a market cap of about $13 billion, but that’s still less than a tenth of the size of NFLX.
iQiyi Stock as the Next Netflix
Last quarter, iQiyi grew revenue 43% year-over-year to $1 billion. While it lost 35 cents per share, that was 17 cents less than the 52 cents per share that analysts had expected. Despite four straight bottom-line misses, a sales and profit beat wasn’t enough to woo Wall Street.
Granted, this came in mid-May when the market was getting crushed and just two weeks after President Trump sent a trade-war tweet that reverberated throughout global markets. In the rebound from the month-long equities tailspin, we haven’t seen the same recovery in IQ stock price as we have in other names.
Further, losses aren’t be shrugged off like they were for Netflix. Even though this quarter’s bottom-line results were ahead of expectations, the losses almost doubled year-over-year. Operating margins slipped, too. I was wrong to think the market would overlook these losses, although I think if the trade-war rhetoric was not present, iQiyi stock price would be rallying, not falling. Or at the very least, it would be stable.
iQiyi is a blend between Netflix and Alphabet’s (NASDAQ:GOOGL) YouTube and if it were a well-known American entity, its valuation would be double or triple what it is now. Last quarter, total subscriber count grew to 96.8 million, up 58% year-over-year from 61.3 million. That’s immense growth and shows just how big the addressable market is in China.
For comparison purposes, NFLX has 148.8 million subs. Comparatively, IQ has 65% of Netflix’s sub count and is growing rapidly, yet just 8% of the valuation.
IQ Stock Headwinds
The stock is caught in the trade-war crossfire, among other headwinds. While IQ stock isn’t directly buffeted by tariffs and production, the Chinese economy is. Further, the stigma attached to Chinese equities isn’t doing the stock price any favors. The same can be said for Alibaba (NASDAQ:BABA), Baidu (NASDAQ:BIDU) and others.
I think iQiyi stock is a solid long-term, speculative bet on streaming. Specifically, Chinese streaming, where the country’s population is roughly four times the size of the U.S. It’s worth mentioning that Netflix is not allowed in China and therefore it essentially eliminates what would be IQ’s largest competitor.
If the trade war situation is eliminated, then Chinese stocks and IQ could be back in favor among investors. Aside from that though, it’s clear investors want to see better cost control from management. If they can tighten up spending without sacrificing growth, this stock could explode higher. Particularly with some trade war resolution.
Estimates call for revenue growth north of 23.5% both this year and next. They also call for losses each year. Better-than-expected bottom-line results could change sentiment a hurry.
Trading iQiyi Stock Price
Click to Enlarge
I’m not a big head-and-shoulders trader, but one could make a case that iQiyi stock price is putting an inverse setup at the moment. That could set the stage for a bullish trade if and when it gets back to the neckline (black line, above).
Whether it’s setting up in that fashion or not doesn’t really matter in the short term, given that it has so many hurdles in the way right now.
First, IQ stock price needs to hold $18. Below puts its monthly lows of $17.18 on the table, where a break below could send IQ into no man’s land toward the year-to-date lows. Provided it holds as support, it will have to contend with the declining 20-day moving average, which is currently weighing on the stock.
Above that brings up the backside of prior downtrend support (blue line) and the declining 50-day moving average. It’s tough trend after tough trend and it won’t be an easy road for the bulls.
Bottom Line on IQ Stock
What’s the best-case scenario for IQ stock investors? Some of the catalysts discussed above. Solving the trade-war dilemma and a promising quarter or two of earnings could go a long way to repairing the technical damage on the chart — and doing so in a hurry.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long GOOGL.
