iQiyi Stock Again Looks Like the Best Bet for China Bulls

IQ has pulled back after a rally earlier this year, setting up to climb again once trade-war sentiment turns

In November of last year, I argued that iQiyi (NASDAQ:IQ) was the best play for investors bullish on Chinese stocks. IQ stock had fallen 56% from its highs at that point and the risks facing the shares were clear. But the argument then was that for investors willing to take on the risk, iQiyi stock had the potentially highest reward of its peers.

iQiyi Stock Again Looks Like the Best Bet for China Bulls
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Admittedly, the call was a bit early — IQ would keep falling into December — but for a moment looked wise. iQiyi stock rallied nicely in the New Year. After a strong Q4 earnings report in February, the stock briefly was up 100% in 2019 alone. But sentiment toward Chinese stocks again turned and IQ stock slid after Q1 earnings thanks to disappointing guidance. IQ has given back much of its gains and actually sits roughly 10% below where it did when I recommended last year.

In short, here we are again. And IQ again looks like a buy. To be sure, it’s a high-risk buy. The company remains unprofitable, and even on a price-to-revenue basis not particularly cheap. Sentiment toward China plays can get worse amid trade war and tariff fears. The chart is ugly, too: investors may not want to catch the proverbial falling knife until it lands.

But the story now is much the same as it was six months ago: IQ is going to rally big, if and when sentiment reverses. And looked at in a certain light, iQiyi stock does look cheap. With a user base set to top 100 million, iQiyi is on the right path. At some point, IQ will reflect that … and hopefully for good.

IQ Stock and NFLX Stock

While iQiyi often is referred to as the Netflix (NASDAQ:NFLX) of China, the comparison isn’t perfect. Much of the company’s content is closer to the user-generated stuff of the YouTube unit of Alphabet (NASDAQ:GOOGL) than to the in-house offerings developed by Netflix. iQiyi, unsurprisingly, can’t take the same pricing or spend the same money as Netflix for that in-house content. Chinese consumers don’t have the same income and, most notably, Netflix never had the same competition.

Indeed, iQiyi appears to have just regained the subscriber lead from Tencent Holdings’ (OTCMKTS:TCEHY) Tencent Video though only by a thin margin. Whereas Netflix has dominated Hulu (now mostly owned by Disney (NYSE:DIS)) pretty much since its pivot away from its former DVD-by-mail business model, iQiyi has been neck and neck with Tencent Video while also competing with Alibaba (NYSE:BABA) unit Youku Tudou.

Still, Netflix represents an interesting guidepost for trying to value IQ stock. That’s particularly important given that iQiyi remains unprofitable as it invests in content and marketing. And the comparison does suggest at least one reason to be bullish — again — on IQ stock.

iQiyi Stock Per Subscriber

It stands to reason that, at the moment, an iQiyi subscriber would be less valuable than a Netflix subscriber. For one, iQiyi pricing is much lower, and likely will stay that way. (That said, many of Netflix’s international markets provide much less revenue per subscriber than does the U.S.) The risk is higher: China’s single-party government could in theory crack down at any time.

Even with those caveats, however, the gap between subscriber valuations for the two companies has grown. At one point last year, an iQiyi subscriber was worth roughly 30% of a Netflix subscriber. By November, the figure was roughly 20%. It’s now 125%. A Netflix subscriber is valued at more than $1,000 (including Netflix debt); the similar figure for iQiyi is just $125.

Again, there should be a gap between the two. But there’s an argument that the gap shouldn’t be this wide — and shouldn’t be expanding. iQiyi’s penetration is much lower, at a little over 20% of Chinese households. Netflix, in the U.S., is near 50%. Obviously, many of those Chinese households don’t have internet access — more than half are lacking — but over time they will. Longer-term, iQiyi has the ability to grow its penetration faster than Netflix, particularly in their respective home markets.

Of course, it’s also possible that NFLX stock is overvalued and that a Netflix subscriber isn’t worth $1,000+, or close. I’ve questioned that stock’s valuation in the past. Still, it does seem like iQiyi users worth more than just a fraction of Netflix users, particularly considering the latter company’s overseas pricing.

And if that gap does narrow, IQ has upside. Get the figure back to last year’s 25%+, assuming NFLX stock continues to trade sideways, and IQ stock more than doubles.

Why IQ Over Other China Plays?

One metric doesn’t make a bull case, nor does it guarantee that iQiyi stock is going to double. To be sure, this is a risky play for obvious reasons. It’s an unprofitable Chinese content creator still valued at 3x+ revenue. As I wrote in November, IQ stock unquestionably can wind up trading to zero. Alibaba and Tencent are fearsome competitors, and there’s no shortage of in-country risk.

This is a “feel” case to some degree. At the least, an investor has to be bullish on China long-term — and to see the recent declines in Chinese stocks as overdone. And that’s kind of the point.

Assuming those two things are true, investors should be targeting the higher-risk plays. The more cautious route is to go with BABA (though that stock has its own significant risks), TCEHY, or JD.com (NASDAQ:JD). Those established — and profitable — companies no doubt will benefit if and when investors return to Chinese plays.

But in that scenario — unless iQiyi is hammered by competition — IQ stock is going to be the better play. Higher risk generally equals higher reward.

To put it another, more aggressive, way: Go big or go home. If an investor wants to go big on China, I again believe IQ is the play to make.

As of this writing, Vince Martin has no positions in any securities mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2019/06/iqiyi-stock-best-bet-china-bulls/.

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