When It Comes To IQIYI Stock, Investors Should Tune Out

It’s been close to two years since IQIYI (NASDAQ:IQ) came public. But the company, which is often compared to the Netflix (NASDAQ:NFLX) of China and is a spin-off of Baidu (NASDAQ:BIDU), has had a choppy performance since its offering. The Initial Public Offering for IQ stock was at $18 a share. As of now, the shares are fetching $22.60 — a gain of 26%. But hey, during this period, NFLX has also had a choppy track record.

China's iQiyi Stock Poised to Benefit From Beijing-Washington Trade Deal
Source: NYC Russ / Shutterstock.com

So what now for IQ stock?  Is it time to consider a purchase?

Well first of all, IQ stock certainly has some notable positives. After all, the company has nearly 106 million subscribers to its streaming service, making it one of the world’s largest video platforms. And of course, there is much more room to grow, as China has more than 480 million households.

Like NFLX, IQIYI has been investing heavily in its premium content. Some of programs launched in the quarter include dramas like Arsenal Military Academy, Love and Destiny as well animation serials and reality shows.

But despite all this, there is a nagging issue: revenues have stagnated. During the latest quarter, growth was a mere 7%.

So what’s going on? There are myriad reasons. For one, the market for higher income subscribers appears to be at saturation levels. While IQ is attempting to penetrate lower-tier markets, this is likely to be challenging. That helps explain why the company has been looking outside of China for growth.

A recent example of this is the company’s deal with Astro, a top Malaysian satellite TV operator.

China’s Economy

Perhaps the biggest problem for IQ stock is China’s languishing economy. It really does look like the trade war had a major impact, as growth in 2019 hit the lowest point in three decades.

Granted, the Phase One agreement with the US will help — but that will likely still be a modest improvement. The fact is there is a long way to go to relive some of the US pressure on China.

To get a sense of the impact of all this on IQ stock, just look at the advertising business. The company reported a grueling 14% drop in the latest quarter, on a year-over-year basis.  Consider that ad spending is highly sensitive to changes in the economy. Simply put, it’s the kind of item that is fairly easy to cut.

In the meantime, the outbreak of the coronavirus will only exacerbate the situation. The city of Wuhan has been put under lockdown (the population is 11 million) and there are transportation controls on at least eight other cities. This comes at the time of the Lunar New Year, which involves heavy consumer spending.

It’s extremely difficult to gauge the impact of this. But when the SARS virus hit China in 2002, the GDP growth dropped from 11.1% to 9.1% when it was at the peak. It’s also important to keep in mind that consumer spending represents a much larger portion of the economy.

Bottom Line On IQ Stock

With the tough economic headwinds, IQ will likely struggle to get growth back on track. Let’s face, the subscription to a steaming service is a highly discretionary item.  It also does not help that content costs continue to escalate, which will continue to adversely impact the bottom line.

So given all the uncertainty, it’s probably best to hold off for now on IQ stock.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/01/when-it-comes-to-iq-stock-investors-should-tune-out/.

©2021 InvestorPlace Media, LLC