iQiyi (NASDAQ:IQ) looks as if it might be the next great streaming buy. As more and more content consumers choose to “cut the (cable TV) cord,” streaming has become the delivery method of choice for series, movies, and other programming. The streaming king in America at the moment may be Netflix (NASDAQ:NFLX), but enterprising investors might wish to look abroad and consider a position in IQ stock instead.
Originally spun off of Baidu (NASDAQ:BIDU) and still 58% owned by that company, iQiyi might look like a funny name in the U.S. but it’s a dominant streaming brand name in China. (Incidentally, I’ve come to learn from InvestorPlace’s own Dana Blankenhorn that the correct pronunciation is “ee-KWEE-kwi,” in case you’re curious.)
In any case, I consider an allocation in iQiyi stock to be a similar bet on Netflix, but with perhaps more growth potential if you don’t mind some downside risk.
Buy IQ Stock for the Subscriber Growth
To fill in the missing pieces of the iQiyi puzzle, the company’s second-quarter reported earnings results are as good a place to start as any. A modest but appreciable 15% increase in year-over-year revenues — $7.11 billion in Q2 of this year, compared to $6.17 billion in the same quarter of last year (originally reported yuan figures have been converted to U.S. dollars) — shows that iQiyi’s business model is creating slow but steady growth and value for longer-term investors.
More important than that is subscriber growth, the bread and butter of any streaming service. The second quarter of 2019 proved to be a milestone for iQiyi as the company’s subscriber count exceeded 100 million during that time – 100.5 million to be more precise. This was a remarkable 50% increase compared to the same quarter a year prior.
Not only that, but iQiyi’s revenues from membership services showed an impressive year-over-year increase of 39% during that same time frame; converted from yuan to U.S. dollars, the reported Q2 2019 figure was $497 million. Yu Gong, iQiyi’s founder and CEO, remains confident that the upward trajectory in subscriber and revenue growth can continue going forward:
We are pleased to report another solid quarter of performance highlighted by our total subscribing members surpassing 100 million… We remain committed to our strategy of enhancing production capabilities of high quality original content and advancing our AI technology innovation in content production, distribution and monetization.
Trade-War Headwinds
I believe that the Q2 figures, along with the performance of IQ stock, would have been even better had it not been for the persistent Sino-U.S. trade war, which has taken a toll on both countries’ economies. Xiaodong Wang, the CFO of iQiyi, indirectly alluded to this:
We achieved continued revenue growth in the second quarter despite some recent challenges facing our industry… We believe our long-term growth landscape remains intact, and we will continue to invest in our original content and technology which serve as the dual engines to drive our future growth.
Given the top-line growth which I detailed earlier, I can’t help but concur with the CFO’s assessment of iQiyi’s future.
The fact that IQ stock shares are trading at 50% of the price peak seen in June of 2018 is viewed as a drawback to some investors, but I see it as a prime buying opportunity for China’s analog to Netflix. I think it’s no coincidence that iQiyi stock started to decline right when the trade war started to ramp up. The same tariff conflict that battered the IQ stock price can also precipitate a swift comeback when the trade war is eventually resolved.
Besides, I appreciate iQiyi’s business model: the company keeps the membership fees super-low at $3 per month (or the yuan equivalent of that amount), while also collecting revenues from the sale of advertisements. This is an added source of revenue that Netflix doesn’t collect – and while American Netflix subscribers probably don’t like ads too much, I see iQiyi’s multiple revenue streams as yet another reason to buy and hold IQ stock.
The Takeaway on IQ Stock
The fact is, even if you’re an American investor, you don’t have to buy a pricey stock like NFLX to take a stake in the global streaming phenomenon. Indeed, there’s plenty of growth to be had in IQ stock, a cheaper alternative to Netflix shares with some risk, I’ll grant, but strong upside potential as well.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
