If the trade war with China is about to end with a whimper, Iqiyi (NASDAQ:IQ) looks cheap. IQ stock rose 6% on Nov. 6.
The Chinese video streaming company was helped both by a quarterly report that was less bad than feared and word that China is ready to bury the trade hatchet with the U.S.
Iqiyi is a partial spin-off of Baidu (NASDAQ:BIDU), the Chinese search engine company. It lost $4.34 per share on revenue of $1 billion during the September quarter but had 30% more subscribers than a year ago. The company also signed a deal to deliver its content in Malaysia, which has a large Chinese-speaking population.
As a result, the stock rose 6.53% in pre-market trade to open November 7 at $18.60, a market cap of nearly $12.4 billion. Baidu shares also rose, by 4%.
Is IQ Stock Cheap?
Reporting on the quarter varied depending on what reporters were looking at. Variety, an entertainment magazine, emphasized the deepening losses. Financial reporters at Marketwatch emphasized that the losses were less than expected.
In fact, the losses were just about in line with the company’s 30% subscriber growth rate.
Shares of all Chinese stocks have been depressed during the trade war. IQiyi (pronounced ee-KWI-kwee) stock is little changed from where it was when the year started.
But the company has changed. It now has about 105 million paying subscribers, almost entirely in China. This compares favorably with Netflix’ (NASDAQ:NFLX) 97.6 million subscribers outside the U.S.
IQiyi, however, is much cheaper, just $2-3 per month, and its programming is supported by advertising. Netflix, which takes no advertising, is only in China thanks to a 2017 partnership with IQiyi.
While IQ has been growing its subscriber base, advertising revenue was down 14% year-over-year in the latest quarterly report. The company blamed this on the local economy and intense competition. IQ’s total subscriber count runs neck-and-neck with that of Tencent Holdings (OTCMKTS:TCEHY) and Alibaba Group Holding (NASDAQ:BABA).
In comparison to U.S. tech companies, however, IQ is dirt cheap. Its market cap is about three times its revenue, the subscriber count continues to rise, and long-term debt is low. If trade peace is more than just a rumor, IQ stock should take off.
IQ Prospects
IQ is interesting because of its differences with Netflix, not its similarities.
IQiyi seeks to completely monetize both its talent and its programming. Netflix merely signs production and delivery agreements with producers. IQ develops and owns its own shows, it advertises against them, and it sponsors concerts to develop talent.
More important, IQiyi is primarily a mobile service. It’s designed to deliver short bursts of fun to Chinese students and workers during their commutes and work breaks. Netflix, by contrast, is built around TVs and long-form evening programming.
The hope of IQ bulls is that the end of the trade war will spark the economy, especially the consumer side. That would deliver more advertising revenue, which is the part of the equation that’s lagging.
The Bottom Line on IQ Stock
I counseled patience on buying IQ last spring, and such patience has been rewarded. Shares have fallen 25% since March.
I have also emphasized its differences with Netflix, but there are similarities. IQiyi has high initial costs for programming detective shows, romantic comedies and costume dramas. These are covered by convertible notes instead of pure debt. This means the upside in IQ stock is limited. Big gains will move people to turn bonds into stock.
Still, if you believe in China, in the Chinese market, and in Chinese ingenuity, IQ stock may be one of the best ways to play that faith. It’s a long-term speculative play for young investors who want to diversify outside the U.S.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA.
