Wednesday was not a great day for the stock market in general. After the Fed announced its first interest rate cut since 2008, markets slumped, with the Nasdaq Composite dropping 1.2% on the day. Shares of China’s video streaming giant, iQiyi (NASDAQ:IQ), performed even worse, closing the day down 1.8% to $18.59. Should investors be worried about IQ stock?
IQ to Report Q2 Earnings
The primary factor influencing iQiyi stock at the moment is likely speculation over what the company will reveal in its Q2 earnings. IQ announced at the start of the week that it would report its Q2 earnings after the markets close on Aug. 19.
Weighing heavily on investors will be the company’s Q1 results, which were reported in May. During that quarter, the number of subscribers to the company’s video streaming service increased 58% year-over-year to 96.8 million. Revenue for the quarter rose 43% compared to the prior year, to $1 billion. However, the company’s advertising revenue was flat YoY. iQiyi blamed the stagnation on “the challenging macroeconomic environment in China and slower-than-expected recovery of our in-feed advertising.”
Despite the subscriber growth, the company reported a net loss of $270.3 million (a more than four-fold increase) and issued Q2 guidance for revenue in the $1 billion to $1.1 billion range, representing an increase of between 12% and 18%. That is significantly weaker revenue growth than the owners of IQ stock are accustomed to seeing. The numbers suggest that the company’s advertising revenue may be in trouble.
And that has meant trouble for iQiyi stock. IQ dropped 17.5% during the month of May. While IQ stock enjoyed a brief recovery in the final days of June and the beginning of July, it’s resumed a downward trajectory. While $18.59 is far from a record low for IQ stock price (it dropped below $15 last December), it’s also nowhere near the $40 levels it had reached last June.
Why IQ Stock Is in Trouble
Netflix (NASDAQ:NFLX) investors have plenty of things to worry about at the moment, but ad revenue is not one of them. The video streaming market leader doesn’t offer an ad-supported version of its service; it relies almost entirely on subscription fees.
While iQiyi also charges a monthly subscription rate, it is far lower than Netflix’s. The cheapest plan offered by Netflix costs $8.99 per month, the most popular plan is $12.99 and the company charges $15.99 for premium 4K service.
As InvestorPlace contributor Josh Enomoto points out, Chinese consumers are more resistant to paying for media content. As a result, IQ is not charging its customers an “economically viable rate” for its video streaming service (it charges around $2 per month), Enomoto noted.
In 2018, IQ said it had around 850 million monthly active users, but remember, it only had 96.8 million paid subscribers at the end of Q1. In Q1, subscriber revenue totaled $513.4 million, and the second largest source of revenue was advertising at $315.8 million.
Like Netflix, the company is continuing to develop original content, including an expansion into movie development. IQ has also invested in sports broadcasting over its platform, buying rights to soccer’s 2014 World Cup and most recently signing a 10-year partnership with the WTA (Women’s Tennis Association). Content is expensive and if paid subscriber fees don’t cover it, then eventually, something has to make up the shortfall.
If IQ is unable to raise its subscription rates to sustainable levels, then advertising — in the form of short commercials played before its free content — is expected to help make up the difference. And if that ad revenue is flat, even as subscriptions rise (the company is essentially losing money on every new subscriber), then IQ stock has a problem.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.