iQiyi Stock Remains a Risky Bet Despite Its Recent Rally

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Shares in Chinese video on demand company iQiyi (NASDAQ:IQ) closed down slightly on Tuesday, but the trend since mid-November has been up. In fact, IQ stock has posted a gain of nearly 13% since Nov. 14.

iQiyi Stock Remains a Risky Bet Despite Its Recent Rally

Source: NYC Russ / Shutterstock.com

Does that signal that it’s a safe bet for continued growth?

There have been multiple rallies for iQiyi stock so far in 2019 — giving it an overall growth rate of 30.5% so far this year — but at $19.40 it’s still way off the $27.70 it hit in February. Let alone the $40.16 it was trading for last June. And investment analysts remain pessimistic about IQ’s prospects over the next 12 months.

IQ Stock Popped, Then Dropped on Mixed Q3 Earnings

On Nov. 6, iQiyi reported its Q3 2019 earnings. Among the highlights were an increase in paying subscribers to 105.8 million (up 31% from the 80.7 million in Q3 2018) and 7% revenue growth to $1 billion. A diluted loss per-share of 70 cents was better than the 72 cent loss that had been expected. The company’s net loss of $516 million for the quarter increased over 19% from last year. Q4 revenue guidance of between $960 million and $1.02 billion straddled Wall Street expectations of $992.66 billion.

The initial market reaction to the Q3 mixed earnings report was positive. IQ stock popped in after market trading, and closed at $20 on Nov. 7, an impressive 14.5% gain. It was short-lived. Over the next week, iQiyi stock gave that back and then some, sliding to $17.19 on Nov. 14 — at which point the latest rally began.

It’s Tough to Be Edgy Under Chinese Government Oversight

Like Netflix (NASDAQ:NFLX), iQiyi has been investing in producing its own content. Doing so helps to differentiate its service from Chinese competitors like Tencent (OTCMKTS:TCEHY). That original content also boosts IQ’s appeal among Chinese consumers compared to traditional TV content. Much of what is broadcast on Chinese TV is scrubbed to meet government restrictions, and being able to offer edgier programming is a big part of the equation in getting Chinese customers to pay for a subscription. And like Netflix, those subscriptions are key to IQ’s long-term success. However, creative freedom can be tenuous. 

As the company prepared for its 2018 IPO, Stanley Rosen, a USC professor specializing in Chinese studies told Deadline: “The government has been more reactive and less proactive when it comes to what’s acceptable for online video, trying to get people and platforms to engage in self-censorship.” 

Earlier this year, that self-censorship was on display, when iQiyi blurred out the earrings worn onscreen by male actors.

At Current Prices, There’s Little 12-Month Upside for iQiyi Stock

In that Q3 earnings report, iQiyi’s CEO was optimistic about the company’s accomplishments and progress:

“We continued to make solid progress during the quarter as we march toward our vision of building a technology-based entertainment giant … Growing 30% year-over-year, our subscription business contributed more than half of our total quarterly revenues for the first time. This once again demonstrated the strength of our platform and validated our dedication to producing high quality original content. Leveraging our cutting-edge AI technology, we are continually fine-tuning our content offerings, optimizing our monetization efficiencies, and exploring potential new runways for future growth. With the rapid development of 5G, we believe there will be astonishing new opportunities ahead, and we will continue to push forward the convergence between technology and art to create deeper value and greater prospects for the future.”

Sounds great, but he’s paid to be optimistic and to convince investors of a rosy future for the company. However, investment analysts aren’t buying it. Of those polled by the Wall Street Journal, IQ stock is rated as a “hold.” With a 12-month average stock price target of $20.12, they see very little upside for iQiyi over the next year.

With competition from other Chinese entertainment giants like Tencent, the possibility that original content could lose its appeal due to censorship, and the clouds of a trade war with the U.S. that could cut consumer spending in China, iQiyi stock remains a risky bet.

 As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.


Article printed from InvestorPlace Media, https://investorplace.com/2019/12/iqiyi-stock-remains-a-risky-bet-despite-its-recent-rally/.

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