No Chinese stock excites traders like Iqiyi (NASDSAQ:IQ).
Iqiyi (pronounced Ee-KWEE-kwi) is a streaming video company focused on people whose primary device is a mobile phone. Its shows are short and highly interactive, perfect for a young worker on their bus ride or coffee break. It is very different from Netflix (NASDAQ:NFLX), although both have intense, passionate CEOs.
Iqiyi is a partial spin-off of Baidu (NASDAQ:BIDU), a search engine and cloud that’s the weakest of that country’s three “Cloud Emperors.” Both Iqiyi and Baidu are growing, but Iqiyi’s losses remain ahead of expectations.
For the quarter ending in June Iqiyi lost $339 million, 49 cents per share fully diluted, on revenue of $1 billion. Iqiyi lost almost the same amount during last year’s second quarter, but with 33% less revenue.
Iqiyi Is Not Like Netflix
The recovery is based on the paid membership. Subscribers pay just $3 per month. Members also see ads, which they don’t do on Netflix. Since IQ users are members these ads can be narrowly targeted.
More recently, I have emphasized the difference between Iqiyi’s model and that of Netflix. It’s now No. 1 in the Chinese market, ahead of Tencent (OTCMKTS:TCEHY) and Alibaba (NASDAQ:BABA), whose parent companies are much bigger.
Iqiyi Is Like Netflix
But in some ways Iqiyi is a lot like Netflix.
As founder and CEO Tim Gong Yu noted in the company’s recent earnings call, Iqiyi creates programs in-house that are tailored to its unique audiences, and spends money ahead of the market.
Its earliest hits were reality games like “The Rap of China,” “The Big Band,” and “CZR,” all variations of “American Idol.” It is now paying more for scripted dramas like “The Thunder,” a detective show, “Go Go Squid,” a romantic comedy, and “Love and Destiny,” a costume epic. Long-term liabilities have doubled, most of them covered by convertible notes.
Iqiyi stock was also hit during its most recent quarter by an industry-wide slowdown in the advertising market. Advertising revenue fell 16%. Its subscriber growth depends on getting better wireless infrastructure in smaller Chinese cities. It also needs to keep customers once they get them, reducing churn and marketing costs per subscriber. Iqiyi is hugely popular among young people in China’s biggest cities. Gong Yu admitted the company needs to raise its game among older people and those in smaller markets.
Unlike Netflix, Iqiyi also has a games business. It recently acquired a game maker called Skymoons. The hope is that Skymoons programmers can deliver games based on Iqiyi shows, and game revenue was up 82% year over year.
The Bottom Line on IQ Stock
Iqiyi is still a speculative stock, but it does have a compelling story.
Bulls will note that Iqiyi is still growing its customer base and that it has several different ways to monetize – memberships, advertising and gaming services. They will point to CEO Tim Gong Yu, who has his company ahead of rivals backed by much bigger companies. They will brush off losses as the price of growth, over 27% year-over-year for the period from January through June.
Bears will question the China story, point to the abundant competition, and note that Iqiyi stock has yet to narrow its losses.
Iqiyi is a game for younger, hungrier investors than me. Buy if you’re young and can afford a loss, watch it closely, and your patience may be rewarded.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA.