IQiyi (NASDAQ:IQ) is China’s answer to Netflix (NASDAQ:NFLX) or Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube depending on how you look at it. But unlike its U.S. rivals, IQ owns most of its content and can fully monetize it. The company also is a “triple threat,” as it makes money from subscriptions, advertising and content distribution. All of this has made IQ stock an appealing play to some, but it hasn’t been without its challenges.
During its most recent quarter, iQiyi posted a smaller-than-expected loss of $516 million, or 70 cents per share, on revenue of $1 billion. The highlight was the $520 million it earned in membership revenue, a year-over-year gain of 30% (in Chinese currency). Game launches from Skymoons boosted IQ’s “other” revenue by 12%. IQ’s advertising business and content distribution divisions both posted double-digit declines.
The company attributed the slowdown in advertising to the “challenging macroeconomic environment” in China. Content distribution was hurt by delays and tough comparisons to last year. Neither decline is particularly surprising nor worrisome.
Shares of IQ have surged more than 30% since January. The median 52-week price target of the 22 Wall Street analysts who follow IQ stock is $140.1, indicating potential upside to its current price of more than 580%. Analysts have a high price target of $222.71 (981% upside) and a low target of $91.55 (344% upside).
This isn’t a misprint.
IQ Is Poised to Overtake Netflix
IQ currently has about 106 million subscribers. That’s surprisingly close to Netflix, which has more than 151 million subscribers around the world. Keep in mind that Netflix was founded in 1997, more than a decade before IQ debuted in 2010. Like NFLX, IQ is also keen on the motion picture business. IQ, though, focuses on Chinese-language features.
“We want to make original films one of our top priorities in the coming two to three years,” CEO Tim Gong Yu told The South China Post earlier this year. “With the slower growth in China’s box office, lower attendance rates at cinemas and the limited options of movies for the country’s cinema-goers, we think the timing for us to make a change in the movie industry has arrived.”
As my InvestorPlace colleague Dana Blankenhorn recently noted, under Gong’s leadership, IQ has embraced artificial intelligence to analyze the films it releases and tries to figure who will watch them. He argues that Gong is a “good man to bet on” because “he has a good understanding of his market and access to leading-edge technology.”
What NFLX Can Learn From iQiYi
IQiyi offers an ad-supported service that’s free to users. As the streaming wars heat up, NFLX will come under increasing pressure from Wall Street to provide either a no or low-cost service to maintain its competitive edge in an increasingly crowded market. Otherwise, NFLX’s subscriber losses will only get worse.
IQ is also reaching out to the 60 million or so Chinese expatriates that reside in about 200 countries around the world, including the U.S., Singapore and Japan. It also is targeting younger consumers with content such as “light novels” illustrated with anime along with video games.
However, investors need to be mindful that iQiyi stock is highly risky so don’t bet the rent money on this one.
As of this writing, Jonathan Berr did not own a position in any of the aforementioned securities.