Last September, shares in Chinese video streaming company iQiyi (NASDAQ:IQ) were in a free fall. By the start of October, IQ stock was trading at $15.72 after plunging 20% in just two weeks. From there, IQ quickly rallied, then gained momentum for a full-blown recovery.
That recovery has it closing in on $24, up 52% in just over three months. That’s a level investors haven’t seen since last spring. With Phase one of the U.S.-China trade deal now signed, the stage could be set for continued growth for iQiyi in 2020.
A September to Remember
The trouble for IQ began after the company reported Q2 earnings last August. On the plus side, iQiyi reported that its subscriber count had grown 50% year-over-year, topping 100 million. And the company said that 98.9% of those were paid subscribers. That’s phenomenal growth. The sheer numbers are also impressive. Netflix (NASDAQ:NFLX) — which operates globally, while iQiyi is only in China — had a subscriber count of just over 151 million at the time.
The down side to that earnings report included a significant slowdown in revenue growth, led by a 16% drop in ad revenue. The company’s operating costs also increased by 40% compared to the previous year. Content acquisition continued, with marketing and sales expenses up sharply. The revenue miss wasn’t enough to hurt IQ badly, but by September, investors were punishing the stock.
Why the change of heart? The trade war began to heat up again in September, with a new round of tariffs. Then a report showed China’s economic growth had slowed to its lowest level since 2002. A video streaming service like iQiyi is considered a nice-to-have for many families. It’s an expense that can be quickly eliminated if a household budget feels pinched. Concern that the trade war would trigger a recession that could tamp the number of paying subscribers and also lead companies to further reduce ad spending on the platform, led to that 20% drop in IQ stock value by early October.
Things are Picking Up
The recovery for IQ stock began in the second week of October. Beijing and Washington reached a preliminary “Phase one” trade deal on Oct. 11, as tensions began to ease. In November, IQ beat estimates for Q3 2019. Advertising revenue remained down, but revenue of $1 billion and a loss of 70 cents per share were better than expected.
IQ climbed through the rest of 2019, a trend that’s continued so far in 2020, with a 13% gain this year. The U.S. and China officially signed that Phase one trade deal last week, and plans are in place to begin work on the next phase. That has boosted optimism that the two countries are finally on the path to normalized trade relations.
Will IQ Stock Continue Gains in 2020?
Assuming the trade war does wind down, the expectation is that China’s economy will not only duck an outright recession, but will also begin to pick up. That would raise consumer confidence and willingness to spend on extras like a paid video streaming subscription. The 105.8 million subscribers iQiyi reported in Q3 sounds as though it might not leave a lot of room for growth, but China is not America. That country has a population of nearly 1.4 billion and over 480 million households.
Will that lead to big subscriber growth in 2020, and a continued increase in value for IQ stock? Investment analysts aren’t convinced at this point. In fact, many are looking for the IQ recovery to stumble. Among those polled by The Wall Street Journal, IQ currently has a 12-month median price target of RMB 146.36, or about $21.20 and a “hold” rating.
When iQiyi reports its Q4 earnings in February, we will have a better idea of whether easing trade tensions began to have a positive effect on subscriber growth and ad revenue. If the U.S. and China can continue to improve relations through 2020, iQiyi is positioned to benefit as the Chinese economy — and consumer spending — strengthens. Should that happen, the IQ stock recovery could well continue in 2020.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.