Despite the fact that Chinese consumers are watching more videos on iQiyi (NASDAQ:IQ), IQ stock continues to decline. Like most other Chinese stocks, IQ has attracted less interest as the trade war between the U.S. and China continues and iQiyi’s losses widen. Since mid March, IQ stock is down 31% compared to a 12.3% decline in the Global X MSCI China Comm Services ETF (NYSEArca:CHIC).
Some investors are concerned that IQ stock has fallen so far that it could find itself retesting its 52-week, $14.35 low, about 21% below current levels. In spite of its widening financial losses, iQiyi generated impressive subscriber growth last quarter. Although IQ stock may continue to fall, further declines or event-related catalysts could make trading iQiyi stock profitable.
IQ Stock Falls Despite Improving Subscriber Base, Outlook
To be sure, iQiyi has built its base by operating as a Chinese-language hybrid of Netflix (NASDAQ:NFLX) and Alphabet‘s (NASDAQ:GOOGL) YouTube. IQ takes the Netflix approach to content development while mimicking YouTube’s strategy of allowing paying subscribers to avoid ads.
IQ has also attracted Netflix-like competition. Following Amazon‘s (NASDAQ:AMZN) example with Prime Video, Alibaba (NYSE:BABA) bought video service Youku Tudou while Tencent (OTCMKTS:TCEHY) launched Tencent Video. To investor disappointment, IQ stock has failed to emulate Netflix’s high valuation, and IQ hasn’t duplicated NFLX’s net profits.
On a positive note, Hollywood prospered during the Great Depression, largely because underemployed workers had more time for movies and a need for escape.
As a result, it stands to reason that the economic slowdown in China caused by the U.S.-China trade war could increase IQ’s viewership. That may help explain the 30% year-over-year increase in its revenues last quarter.
Nonetheless, traders continue to sell IQ stock. In the past, I pointed out that IQ stock has rightly fallen, but for the wrong reasons. Since February, that trend has reappeared. Repeating the previous pattern, trade wars, not financial losses, probably explain IQ’s recent decline.
iQiyi Stock Could Stop Falling Soon
While I do not think IQ will ever attract Netflix-like valuations, I believe the decline of iQiyi stock might end soon. IQ now trades at only 2.79 times sales, well below Netflix’s price-sales ratio of 9.1.
Moreover, investors should not ignore IQ’s subscriber growth. iQiyi reported that its subscriber base grew by about 10% quarter-over-quarter, enabling its subscriber base to overtake that of Tencent Video. Similar to Netflix a few years ago, IQ prioritizes subscriber growth over profits. Last quarter, its losses expanded. Still, despite wider losses, analysts, on average, believe IQ will become profitable in 2021.
Further, while IQ stock will probably continue to fall for awhile, I see indications that it could stop dropping soon. With its 30%-plus tumble since March, one has to wonder whether IQ will retest its 52-week low of $14.35 per share. A double bottom near that level could send IQ stock higher.
Also, even though I do not agree with this thinking, IQ and other Chinese stocks fluctuate based on the trade war. While more trade with the U.S. would probably reduce the amount of time Chinese citizens have for iQiyi, I have to admit that a U.S.-China trade agreement would likely send IQ stock higher.
Bottom Line on IQ Stock
iQiyi stock may soon become a buy. It has been steadily declining since it peaked in early March. While the decline may continue, IQ is falling toward the 52-week low it achieved at the end of last year. Moreover, the trade war that has weighed on iQiyi stock and other Chinese equities should not negatively affect the company. In fact, given the history of entertainment companies in harder times, a trade war should increase iQiyi’s revenues.
IQ stock needs either a positive catalyst or evidence of a chart-related floor such as a double bottom near the $15 per share range. Once the stock or outside events produce such a catalyst, I think IQ can return to its March highs and perhaps beyond.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
