With just a quick glance of the technical charts, iQiyi (NASDAQ:IQ) appears to be a great bargain. The Chinese entertainment streaming company is back near subterranean levels after soaring briefly to unbelievable heights. In the second half of June, IQ stock closed at $44.20. Against that benchmark, shares have shed over 60%.
Of course, an equity that has lost that much within a year-and-a-half typically arouses concern, not buyer’s anxiety. But the possibility that iQiyi stock can once again reclaim the $40 level has surely danced in speculators’ heads. From where we are right now, if IQ hit $40, the move would represent a 131% upswing.
Not only that, IQ stock seemingly has exceptional fundamentals. First and foremost, many experts and lay folks talk about iQiyi as being China’s Netflix (NASDAQ:NFLX). I don’t have to explain the similarities to you: both services are inexpensive, popular with their subscriber base, and incredibly convenient. These two have made watching traditional TV irrelevant.
Second, IQ released its earnings results for the second quarter of 2019 a week ago. One of the key takeaways was that the subscriber base hit 100.5 million. Better yet, 98.9% of them are paying subscribers. To note, iQiyi has a free viewing options with advertisements, which virtually everyone is avoiding. On the surface, both these factors support the bull case for iQiyi stock.
And this robust sub base segues into perhaps the biggest argument for IQ stock. At just over 100 million subs, this is only about 7% of China’s 1.4-billion strong population. If the company can achieve greater penetration, iQiyi stock can fly to unprecedented levels.
Potholed Runway Awaits IQ Stock
Again, on the surface, the subscriber-growth argument makes sense. Roughly speaking, Netflix has over 60 million U.S. subscribers. Assuming a U.S. population size of 330 million, that amounts to an approximately 18% domestic penetration rate.
Therefore, with iQiyi’s 7% domestic penetration, iQiyi stock theoretically has plenty of runway. And that’s just in terms of a numbers-to-numbers comparison with Netflix. With a population size over four times that of the U.S., iQiyi has exponentially greater potential.
But I think this is where the comparison should stop. Actually, it really shouldn’t even begin. I say this because China’s digital consumer population is probably a lot smaller than you think. And you know I’m going to use this phrase, but yes, this dynamic bodes poorly for IQ stock.
For instance, approximately 35% of China’s workforce is in agriculture, and for good reason: China feeds 22% of the world’s population. In contrast, only 2.5% of American workers ply their trade in agriculture.
The percentage differentials here are so vast that it’s likely the average Chinese person knows at least one farmer. If we don’t include the local farmer’s market, most of us don’t know anybody in agriculture.
I bring this up to remind us that while digitalization is exciting, it hasn’t impacted everyone. That’s one of the problems facing IQ stock in terms of subscriber growth potential.
Another issue is that we can’t afford to have China modernize too much. As far as I know, I cannot eat my smartphone. That means the 35% agricultural labor allocation probably won’t change much meaningfully, thus limiting the true potential for iQiyi stock.
When we talk about iQiyi’s sub-growth runway, we should talk about practical potential, not numerical potential. Surely, the company will not convert the lion’s share of the population.
iQiyi Stock Lacks Brand Power
Although bulls were excited about iQiyi’s Q2 numbers, in context, I don’t find them particularly impressive. For example, Q2 revenue came in at $1.04 billion. That’s a modest 7.5% year-over-year lift, especially for a growth stock.
And that was one of my arguments against IQ stock when I wrote about the company in July. Simply, growth in top-lines sales has stagnated over the past several quarters. Like Netflix in the U.S. market, iQiyi may have hit a saturation point in China.
So, what should the company do? Like similar organizations, iQiyi has been looking abroad for their growth shortfall answers.
Here’s a nagging question for stakeholders in IQ stock: how many of us can name a modern, relevant Chinese actor or actress? And don’t say Jackie Chan because that confirms my point: Chinese media lacks the brand power that Netflix levers via Hollywood.
As a result, I don’t want to mess around with iQiyi stock. There are several problems here even without worrying about a global recession. But with it, the case just gets worse for IQ.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
