iQiyi (NASDAQ:IQ) may be up nearly 25% on the year, but at $18.53 it’s a long way from the $27.70 it hit in February. And miles from last June when IQ stock topped $40. After slipping another 2.42% in trading on Friday, iQiyi stock continues to experience volatility.
Depending on your perspective, that could make it worth considering — assuming it’s going to rebound after this latest drop — or you could decide that IQ is in for a rough ride and should be avoided for now.
There’s a case to be made for both positions.
The Bull Case for IQ Stock
Everyone is excited about video streaming at the moment. In the U.S., Netflix is preparing to defend its market dominance against a flood of new competition, including streaming video services from Disney (NYSE:DIS) and Apple (NASDAQ:AAPL). Billions of dollars are being spent on bidding for popular television shows to add to these services, while billions more are being invested in original content.
Chinese consumers are also embracing video streaming, but the market there is in a much earlier stage. Where Netflix stock has taken hits because of slowing subscriber growth — and an actual loss of subscribers in its increasingly saturated home market in the last quarter — China is booming.
The country has a massive population and plenty of room left for subscriber growth. The market for paid streaming video services in China is on track to triple in size by 2022 from 2018 levels, and by the end of 2018, three of the five largest subscription streaming video services globally were Chinese companies.
Netflix still dominates (it closed 2018 with 24% of global streaming video subscribers), but iQiyi wasn’t far behind at 15%. While iQiyi doesn’t generate anywhere near the same revenue numbers as Netflix (in 2018, China’s top three streamers combined for roughly $8 billion in revenue compared to $16 billion for Netflix), the company has been successfully converting users from free, ad-supported viewing to paid subscriptions.
Adding to the bull case for IQ stock is the fact that strict regulations have kept American competition out of China. The closest Netflix has come to breaking into the market is to license original content to a Chinese streaming company — iQiyi.
Why There Is Hesitation About iQiyi Stock
While there is certainly a bull case for IQ stock, there are also many factors that are holding it back. Analysts currently have a median 12-month price target of $20.19, suggesting a lack of confidence that IQ is going to be trading anywhere near the levels it hit earlier this year — let alone the $40 level it topped last summer.
Despite its success in signing up subscribers, iQiyi’s last quarterly earnings report showed worrying trends. InvestorPlace’s Vince Martin points out that revenue slowed dramatically, advertising revenue declined double digits, and IQ’s costs to produce and market original material continued to rise.
The nature of the video streaming business means that if iQiyi reins in content spending, subscriber growth slows and it risks losing existing customers. At the same time, the trade war with the U.S. is hurting the economic climate in China. That makes consumers less likely to sign up for a subscription service, and makes existing customers resistant to price increases.
Adding to the concerns, there have been rumblings that the Chinese government may consider opening up the country’s video streaming market to foreign competition.
While not insurmountable, these challenges are all weighing on IQ stock. There is no argument that iQiyi has seen considerable success in becoming a dominant player in the Chinese video streaming market, but there are an awful lot of potential obstacles ahead. Any one of these could hurt the company’s prospects, making iQiyi stock a risky bet at this point if you’re looking for a long-term growth stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.