When Chinese streaming company iQiyi (NASDAQ:IQ) had its initial public offering last year, it almost immediately rewarded early speculators. From its $18 starting point, IQ stock jumped well above $40 in a matter of months. But in short order, shares hemorrhaged badly, at one point dipping sharply below their IPO price.
As if to tease those early believers, iQiyi stock offered a repeat performance this year. From subterranean levels in January, IQ briefly mounted a challenge toward the $30 mark. Similar to what happened last year, sentiment quickly soared when investors realized that the fundamentals didn’t quite justify the bullishness.
We’re essentially back at square one. IQ stock currently trades hands at just over $19 a pop, less than 6% above the IPO price. Disappointment doesn’t quite do this situation justice, considering that Chinese firms like Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD) have performed relatively well this year.
On the other hand, iQiyi stock is incredibly deflated from its all-time highs. More importantly, the underlying company has earned the unofficial title of China’s Netflix (NASDAQ:NFLX). IQ has 100 million subscribers. And as our own Jamie Johnson noted, 98% of them are paying customers.
Plus, iQiyi has no shortage in terms of ambition. A few months back, CNBC reported that the company is rolling out an original movie business. With Chinese ex-patriots all over the world, this strategy represents a major boon for IQ stock.
Does this mean you should bet on iQiyi stock? Not really, and here are three reasons why:
IQ Stock: Growth Stock Ain’t Growing
When people compare iQiyi with Netflix, they’re almost always doing so because of their shared streaming platform. But if we’re making that comparison, it’s fair to have similar expectations for iQiyi stock from a technical perspective.
In other words, NFLX is a growth stock. If we’re being consistent, that descriptor should apply to IQ stock as well.
And for the most part, no one is going to argue against this point. After all, China is still a developing nation. On a GDP per-capita basis, its citizens are poor because the Asian juggernaut has quadruple the U.S. population. Thus, as much growth as China has witnessed, more upside potential exists.
But when it comes to IQ stock, that potential appears tapped out. In the second quarter of 2018, the Chinese streamer generated $969 million in revenue. In the most recent Q1 2019 earnings report, management disclosed top-line sales of $1.04 billion.
So in three quarters, sales grew a little over 7%: that sounds like a boring dividend-bearing blue chip mired in a mature, saturated market. Certainly, it’s not worthy of being compared to one of the most exciting and transformative companies in the modern era.
Therefore, unless you have some compelling reason to believe that Q2 will bring home the goods, I’d avoid iQiyi stock.
Negative Earnings Raise Eyebrows for IQ Stock
I’m not one to harp on negative earnings. As many InvestorPlace readers may know, I’m particularly fond of the legal marijuana industry. Therefore, I’ll never get on my red-ink high horse unless I have to.
But with IQ stock, I must do exactly that. Let’s start with the obvious headwind. As I explained above, many folks associate iQiyi with Netflix, a veritable growth stock. Even after all this time, Netflix consistently reports strong, double-digit growth on a year-over-year basis.
IQ stock? We’re going to see single-digit growth in Q2 2019 unless something big happens.
But the worrisome part here is that investors can forgive Netflix for running key financial metrics into the red. Of course, it’s not favorable, but the growth justifies the aggression. With iQiyi stock, we have plenty of aggression, but not so much in terms of results.
And let’s go back to Johnson’s point about the 98% paying customers statistic. If that’s true, I shouldn’t see an acceleration of negative “growth” in operating income. But profitability across the board is bleeding badly.
Barring some accounting conspiracy, this only means one thing: iQiyi isn’t charging their customers an economically viable rate. Furthermore, I don’t think they can, which leads to my next point:
Chinese Customers Don’t Want to Pay (Much)
Most of the world, particularly Americans, have gotten fat off low-priced Chinese junk products. As consumers, we demand more for less, and that just drives manufacturing further into developing countries, “MAGA” be damned.
Is it any surprise, then, that the emergent Chinese consumer has adopted some of our consumptive habits?
Moreover, from a historical perspective, the Chinese don’t value media content as much as we do. For decades, China was ground zero for content piracy. Guess what? Nothing has changed.
Under this context, I just don’t see Chinese consumers forking over their hard-earned yuan for something that they can get for free. That poses major challenges for IQ stock.
Plus, the ongoing bitter U.S.-China trade war, along with internal distrust of the Chinese government, has incentivized belt-tightening. Combined with the specific challenges of entertainment media in China, I’d avoid iQiyi stock for the time being.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.