IQiyi (NASDAQ:IQ) stock opened Dec. 2 trying to hold the bounce it got from the company’s recently reported third-quarter earnings.
The Chinese streaming media company beat estimates with a loss of $516 million, 70 cents per share fully diluted, on revenue of $1 billion.
Membership revenue, however, was up 30%, to $520 million. There was also a 12% gain in “other,” mainly video game revenue from licensing titles to a company called Skymoons. The problem was in ad revenue, which was down on softening consumer markets. The company’s conference call, however, set big plans to offer content on regular TVs, in theaters and through Virtual Reality, not just through mobile phones.
IQiyi has analysts pounding the table for IQ stock and I’ve been bullish on it myself.
IQ Stock: More YouTube Than Netflix
IQiyi is a bet on the “New China,” a high-tech consumer culture with unlimited potential. If your image is of “Communist China,” the oppressive one-party state threatening America on every side, you don’t want to invest in IQ.
While it’s sometimes called the “Netflix (NASDAQ:NFLX) of China,” IQiyi is more like China’s YouTube, only with a highly proprietary twist.
Like the Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) video unit, iQiyi rides on its parent’s content delivery system, hosts in its cloud and shares its technology obsessions, in this case, faith in Artificial Intelligence. It also hosts the social media content around its shows. Unlike YouTube, however, iQiyi owns most of its own content and can fully monetize it in games and merchandising.
Parent Baidu (NASDAQ:BIDU), retains a 48% stake in iQiyi. IQiyi is in a tight race for market leadership with units of Alibaba (NYSE:BABA) and Tencent Holding (OTCMKTS:TCEHY).
Baidu, however, is no Google. Baidu has been a terrible investment, the shares down 48% over the last five years. That’s why ancillary units like IQ were spun out. Baidu also reported a strong third quarter, however.
Betting on Yu
IQiyi was founded in 2010 by Tim Gong Yu. If you’re betting on iQiyi today, you’re betting on him. He sees the Chinese market as completely unlike that of the West — far more volatile. He sees opportunities in locally produced films that, like Netflix’s The Irishman, go first into cinemas and then online.
IQiyi also runs its movies through an AI analysis on genre, characters, story arc and target audience before final changes are made and the film is released. Rather than just analyzing what people watch, iQiyi tries to figure out who will watch its movies before releasing them.
The IQ programs that Gong Yu greenlights are mostly high-touch games, soap operas and adventure stories the company holds full title to. IQ creates its own programming ideas, executes them and holds rights to everything inside them.
IQiyi has 105.3 million subscribers or members, but also sells ads. It is in a race with rivals to penetrate smaller “third-tier” cities where consumers have more time than money, and to expand internationally. It recently signed a strategic partnership covering Malaysia.
The Bottom Line on IQ Stock
To believe in iQiyi stock, you must first believe in China as a large consumer market with an expanding geographic horizon.
Seen in that light, Tim Gong Yu is a good man to bet on. He has full control over his content, a good understanding of his market and access to leading-edge technology. As a spinoff rather than just a unit manager, he is also fully in charge.
Even for younger investors, this is a speculation. IQ is a stock you put some of your “mad money” on; money you can afford to lose. If the world blows up, you’re toast, but if it doesn’t, you could win big.
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.
