3 Reasons Even Patient Investors Should Continue to Wait on IQ Stock

iQiyi (NASDAQ:IQ) reported disappointing Q2 2019 earnings in mid-August. Yet, IQ stock hasn’t lost any ground in the six weeks since releasing those results. 

3 Reasons Even Patient Investors Should Continue to Wait on IQ Stock
Source: Jarretera / Shutterstock.com

I’m no technical analyst but it appears as though $17.15 seems to be shaping up as a floor price for iQiyi stock. On three occasions since the end of July, IQ has bounced off the $17.15 level, each time failing to break below that key level. 

That’s great news if you own IQ stock. 

I’ve suggested in recent articles that IQ is a really good buy at $15. The inability of its stock to fall below $17 suggests there is strong support at that level. Only some really bad news is going to shake IQ out of this range. 

That said, I still believe that IQ stock will hit $15 before the end of the year. Here are three reasons why. 

Advertising Continues to Weaken

In May, I argued that the company’s online advertising’s failure to grow in the first quarter was a sign that the Chinese economy is slowing, which wouldn’t be good for iQiyi’s dual-track revenue stream model.  

So, the fact that it followed up a weak Q1 with an even weaker second-quarter — online advertising services saw revenues fall 15.9% — should be a warning to iQiyi shareholders that all is not perfect with the Chinese video streaming company. 

Online advertising through the first six months of the year accounted for 31% of its overall revenue. Its online advertising services accounted for 50.3% of its overall revenue in 2016, 46.9% in 2017, and 37.3% in 2018. 

It’s not hard to spot the trend.

Furthermore, as online advertising revenue has been declining as a percentage of its overall revenue, its operating losses have been rising. I doubt it’s a coincidence. 

Until the company can demonstrate that its business model can become profitable without its online advertising services business growing, I see troubles ahead for its stock price. 

Membership Services Slowing

If membership services are to be the lynchpin of iQiyi’s business model, the segment has got to be growing. While revenues grew by 38% year over year in the second quarter, they actually fell from the first quarter.

If I’m investing in a money-losing stock, I want to see both year-over-year and sequential growth. Anything less than that suggests the business model is prone to breaking down as a result of outside forces (slowing economy) that are beyond its control. 

You can only control what you can control. 

However, InvestorPlace contributor Luke Lango pointed out in August, shortly after iQiyi reported its earnings, that excluding online ads, the company’s ARPU still dropped

So, even though it grew its membership services revenues by 38% in the quarter, it did so at the expense of both the top- and bottom-line. 

In my book, that’s a losing proposition. If it wants its stock to move into the $20s, it has to move the ARPU number higher on both a year-over-year and sequential basis.

Don’t get me wrong. In the big picture, I see a business that’s meeting the entertainment needs of Chinese consumers. Long-term, if it can figure some of these things out, it’s a winner. 

Q3 Guidance Could Hurt IQ Stock

At the very bottom of the company’s Q2 press release, readers could find its financial guidance for the third quarter. 

iQiyi expects total revenues to grow between 4% and 10% compared to Q3 2018. In the second quarter last year, iQiyi’s third-quarter guidance called for revenue growth between 43%-49%. It actually delivered 48% revenue growth in Q3 2018, at the high end of its guidance. 

Assuming it hits the high end of its guidance when it announces Q3 2019 results in late October, 10% is quite a comedown from 48% a year earlier. And while iQiyi is a bigger company than it was a year ago, making 48% a tough growth number, I would think 20-30% growth would be a reasonable expectation from a growth company not making money. 

If iQiyi’s overall revenue growth is at the bottom end of its guidance, or heaven forbid, it misses its guidance completely and actually loses ground, IQ stock would definitely breach that $17 support level. 

My gut tells me the company is being conservative in its guidance and it will do better than 10%, but I don’t have any empirical evidence that this is actually the case. 

We’ve got a month of trading before iQiyi announces Q3 2019 results. I still believe you’ll be able to buy IQ stock for $15 before the end of the year. However, I doubt it will happen until after the third-quarter results are out. 

Until then. Happy Investing!

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/09/3-reasons-even-patient-investors-should-continue-to-wait-on-iq-stock/.

©2020 InvestorPlace Media, LLC