iQiyi (NASDAQ:IQ) stock was sold to retail investors as “the Netflix (NASDAQ:NFLX) of China.” Of course, that drummed up some pretty serious demand, with IQ stock running from about $15 in April 2018 to more than $45 in less than two months.
Since that blow-off top though, iQiyi stock has been in the doldrums. Of course, being sold as “the NFLX of China” doesn’t help when Netflix stock is struggling as well.
In any regard, IQ stock is more like a blend between Netflix and Google’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube. And it does operate in China, which is a huge advantage, considering many platforms — YouTube and Netflix included — are banned from the country.
It’s not hard to see that iQiyi has a huge opportunity in front of it. With China’s population nearing 1.4 billion and with more than 800 million internet users, it’s no secret that streaming video should be a lucrative spot.
So why is the NFLX and YouTube of China doing so poorly? Shouldn’t IQ stock be riding high?
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What’s Up With iQiyi
There have been a few problems with iQiyi stock since it came public in Q2 2018. First, the company loses plenty of money. In the seven quarters that it has reported as a public entity, IQ has missed profit estimates in six of those events.
For the record, it missed revenue estimates for three of those seven quarters, although it has now beat estimates four quarters in a row. Still, the company’s inability to control spending and report better-than-expected bottom-line figures has investors frustrated and concerned.
While the numbers should play the only role, my personal opinion is that geography has played a large role in the fate of IQ stock as well. It doesn’t help that there’s an ongoing trade-war saga between the U.S. and China. But even worse is that most, if not almost all U.S. investors are unfamiliar with iQiyi’s platform.
How many U.S. investors have actually used it? Now compare that to Netflix or YouTube and it’s hard to say that IQ — net losses or not — commands the same valuation as some of its U.S. counterparts.
That’s not a knock on the American investor, it’s just an observation. It’s one that makes sense, too. People invest in what they know, and if they don’t know iQiyi, they’re less likely to buy IQ stock.
To overpower that lack of interest, IQ needs to be better about cost control. It’s not as if it’s profitable and missing estimates — it’s unprofitable and missing expectations. The cash burn is quite concerning, and while user growth is still strong (+31% last quarter), revenue grew just 6.5% year-over-year.
A lack of investor awareness and a trade war don’t help, but cutting costs and reducing cash burn would help significantly.
Trading IQ Stock
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Should iQiyi stock start to turn the corner by improving revenue growth and reducing its losses, the stock price could take off. Already we’re seeing an improvement in IQ stock.
As you can see on the daily chart, iQiyi stock has struggled with the 200-day moving average. This metric has been resistance for many months, weighing on IQ each time it rallies. However, on Friday Dec. 6, the stock rallied through and closed above this mark.
It was a significant development, and while IQ stock has declined in the two days since, it has closed above the 200-day moving average in both sessions. I’m not sure it will hold, but the development has been promising for bulls.
On the plus side, uptrend support (purple line) and the 20-day moving average have been guiding IQ stock higher. Should they fail as support, it could send iQiyi stock down to the 50-day moving average. However, if they continue to act as support, look to see if IQ stock can keep above the 200-day moving average and the 38.2% retracement just under $20. Above both levels may mark a turning point for the iQiyi stock price.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long GOOGL.
