As the latest round of U.S.-China trade talks get underway, Chinese stocks are once again in focus. Therefore, today I’d like to discuss the outlook for iQiyi (NASDAQ:IQ), the Beijing-based online streaming and entertainment company. In recent months, it hasn’t been easy to be a IQ stock investor. Since late February, iQiyi stock has fallen more than 45%, from a 2019 high of $29.18 to a recent low of $15.12. Currently, iQiyi stock is hovering around $16.20.
Although iQiyi stock will likely reward long-term investors, it may continue to be volatile over the next few weeks. Here’s what you need to know…
How iQiyi Stock Makes Money
iQiyi stock, a spin off from China’s search leader, Baidu (NASDAQ:BIDU), offers investors the enticing possibility of investing in the growing Chinese consumer economy. Currently, IQ stock has four revenue streams.
- Membership services (subscribers can view new, exclusive contents without ads);
- Online advertising (non-paying viewers must watch a 90-second advertisement before seeing any content);
- Content distribution fees (iQiyi receives these fees in exchange for licensing its original content);
- Other revenues (such as the online game business)
In other words, IQ’s management has been building a rather diversified business model. At present membership services and online advertising services contribute to total revenue the most.
On Aug. 19, IQ stock released Q2 financial results that raised eyebrows. iQiyi’s report showed top-line deceleration alongside a big increase in costs.
Total revenues were RMB 7.1 billion ($1 billion), representing a 15% increase from the same period in 2018.
Yet, one important factor investors need to keep in mind is that IQ is not yet a profitable company. Its net loss widened to RMB 2.3 billion from a net loss of RMB 2.1 billion in Q2 2018. IQ stock’s operating loss margin also worsened to 26%, compared to 22% a year ago.
Long-Term Tailwinds for IQ Stock
Despite the mixed quarterly results, iQiyi is currently one of the world’s largest online video sites, producing high-quality content, increasing viewership and overall memberships. Viewers spend about 6 billion hours on its platform every month.
IQ stock’s total number of members was 100.5 million as of June 30, 2019, 98.9% of whom were paying subscribing members. This compares to 67.1 million of total subscribing members as of June 30, 2018, up 50% YoY. By comparison, Netflix (NASDAQ:NFLX) has about 150 million subscribers globally.
iQiyi is still a high-growth company operating in a high-growth sector, i.e., global video streaming. Due to Chinese regulatory guidelines, foreign companies are finding it difficult to enter the market directly. Chinese legal structure has therefore helped iQiyi stock become and stay as one of the dominant players in the country.
Management is also investing heavily in artificial intelligence (AI) and big data analytics, and to help increase membership numbers and platform use. iQiyi is also adding new content to its library. For example, iQiyi Sports has licensed worldwide content from sports organizers such as the WTA, PGA and Spain’s La Liga.
Analysts expect the next several earnings report to show that its P/E growth rate for 2020 is over 35%. This growth in revenue is expected to trickle down to the company’s bottom line in the coming years.
There have been quite a number of recent academic studies on the growth of streaming video services in China as well as the greater Asia-Pacific region. Thus, those who own IQ stock will likely be able to participate in the growing online video market in China. IQ stock is well-positioned to capitalize on this trend. Additionally, many analysts expect iQiyi to expand into the rest of Asia.
Short-Term Headwinds for iQiyi Stock
In March 2018, iQiyi stock priced its U.S. initial public offering at $18. It reached the low $40s three months later. The current lack of confidence in the stock — which has sat below the IPO price for most of the past month — is in part due to headwinds faced by almost all China-based stocks.
In late September, breaking news hit the wires that the administration was considering restricting Chinese companies’ access to U.S. capital markets, including their forced delisting from U.S. stock exchanges. It is also likely that U.S. government pension funds will not be allowed to from invest in the Chinese market. Overall, such a broad restriction would affect dozens of U.S.-listed Chinese companies, including Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), Baidu and, of course, iQiyi.
At present, investing in IQ stock as well as other Chinese companies is not without risks. And the short-term case for bullish investors does not yet look compelling. As iQiyi shares topped out more than half a year ago, IQ stock’s technical charts have also become damaged.
Therefore, in the coming months I expect the IQ stock price to be a battleground between long-term investors and short-term traders. iQiyi stock is likely to find bids as it goes below $16. On the other hand, $18 level is likely to act as resistance.
In other words, investors should be ready for daily price fluctuations as well as high volatility in the coming weeks.
The Bottom Line on IQ Stock
The job reports released on Oct. 4 provided a much anticipated relief rally. But as many tech stocks begin to release quarterly earnings and as trade talks resume, IQ stock investors may become cautious in the rest of the month.
Therefore new investors may want to wait until we have more clarity on the potential developments regarding U.S.-China negotiations.
On a final note, Baidu still owns over 55% of IQ stock and about 20% of BIDU’s revenues come from IQ. Therefore, those investors who may not be ready to invest in IQ may consider buying BIDU stock. Such a move would give those investors exposure to iQiyi stock, too.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
