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Why iQiyi Stock Investors May Have to Brace for February Volatility

Beijing-based iQiyi (NASDAQ:IQ) is a leading online streaming video platform. The IQ stock price increased from a 52-week low of $15.12 on Oct. 2, to a recent high of $25.14 on Jan. 22. Now the shares are hovering around $21.50.

Why iQiyi Stock Investors May Have to Brace for February Volatility
Source: NYC Russ /

The company went public in March 2018 at an opening price of $18.25. Since then, it has attracted significant attention, mainly for its growth potential. It is often referred to as the Netflix (NASDAQ:NFLX) of China. On Feb. 6, the group is expected to report fourth quarter earnings.

Given the recent volatility in China-based stocks, let’s take a closer look at whether this may be an opportune time to buy into the IQ share price.

What to Expect Earnings

With its Nov. 6, 2019 earnings release, the company reported a 7% increase in revenue YoY, to $1.0 billion. Many analysts regarded it as a less-than-stellar improvement. The group reports revenue in four segments:

  • Membership services showed a 30% increase YoY (subscribers can view new, exclusive contents without ads);
  • Online advertising was down 14% YoY (non-paying viewers must watch a 90-second advertisement before seeing any content);
  • Content distribution fees fell 12% YoY (iQiyi receives these fees in exchange for licensing its original content);
  • Other revenues showed a 18% increase YoY (this segment includes its online game business).

The strong performance in membership services came from solid growth in the number of subscribing members. As of Sept. 30, 2019, the number of total subscribing members was 105.8 million. This is a significant reach. To put this number into perspective, Netflix has 167 million paid memberships worldwide. Investors were pleased to learn that 99.2% of were paying subscribing members, up from 80.7 million a year earlier. So subscriber growth has been vibrant.

However, management highlighted that online advertising services revenue fell, “mainly due to the challenging macroeconomic environment in China, the delay of certain content launches and the intensified competition in in-feed advertising.”

Another point of concern was the 7.7% increase YoY in the company’s operating loss. The operating loss margin now stands at 38% vs. 37% in the same period in 2018.

The main takeaway was that iQiyi’s business continued to grow despite setbacks in advertising and content business. However, it continued to burn through cash, especially as it invested in content. Its original content currently includes some of the most popular shows in China and management would like the trend to continue. Yet high production costs are outstripping membership and advertising revenues.

In the upcoming quarterly report, the Street is likely to pay particular attention to IQ stock’s cash position and the prospects for becoming profitable in coming years. Investors may not be too forgiving if losses continue to mount. Analysts would also like to see the company deliver membership growth numbers that shareholders are beginning to get used to.

China’s Growth is the Long-Term Tailwind for IQ Stock

After the U.S., China is the world’s second-largest economy. And it’s also the world’s most populous nation. So markets pay attention to any news headlines that may have a China component.

Early January saw the signing of phase one of the trade deal between China and the US. As the trade relations have gradually improved, risk appetite for Chinese stocks such as IQ has also increased.

iQiyi is still a high-growth company operating in a high-growth sector. In China, video websites are now extremely important for viewers to watch movies, shows and short videos.

China’s middle class is expanding and adopting technologies like e-payments or use of mobile phones in daily life at a faster rate than many other developed economies, including the U.S.

Due to Chinese regulatory guidelines, foreign companies are finding it difficult to enter the market directly. Chinese legal structure has therefore helped iQiyi stock become and stay as one of the dominant players in the country.

Management is also investing heavily in artificial intelligence (AI) and big data analytics, and to help increase membership numbers and platform use. It is also adding new content to its library. For example, iQiyi Sports has licensed worldwide content from sports organizers such as the WTAPGA and Spain’s La Liga.

Moreover, the company has recently launched a multilingual app that can be downloaded globally from Apple’s (NASDAQ:AAPL) App Store and Alphabet’s (NASDAQ:GOOGL) Google Play Store.

And it’s expanding its global outreach with local language support in Southeast Asia, including Malaysia, Indonesia, and Thailand.

Therefore, investors can expect the company to keep growing the subscriber base in 2020 and beyond. And that is important as it generates the bulk of the revenue through these paid subscriptions.

Headwinds from China’s Troubles

However, investing in Chinese companies means being affected by adverse developments from this important market, too. The latest global anxiety is now about the spread of the coronavirus.

Health authorities believe the outbreak is controllable. Yet as well as natural concern for those suffering from the illness, many are worried that there might be adverse economic effects in China and also worldwide.

Broader stock markets in general and Chinese stocks in specific have already taken a considerable hit in the past few days. IQ stock price fell over 15% in a matter of days.

Currently, it faces intense competition from Tencent Holdings’ (OTCMKTS:TCEHY) Tencent Video and Alibaba’s (NYSE:BABA) Youku Tudou. All three companies understandably go after similar membership and advertiser bases. Due to weaker economic growth, Chinese companies may trim their marketing spend.

Any prolonged economic slowdown could easily put further pressures on the company’s already declining advertising revenue. It may also be harder to add new fee-paying subscribers.

But events such as the effects of a health scare tend to be short-term issues and many shareholders do not regard investing as a short-term activity.

If history is a guide, any adverse impact on Chinese growth is likely to be short lived. Although China’s economy may slow down in the near future, its GDP is still expanding at an average annual rate of 6% minimum, faster than almost any other major economy.

Therefore, if you are bullish on the long-term fundamentals of the stock, the recent price drop may indeed give you the opportunity to buy into the shares at a lower price.

Bottom Line on IQ Stock

In all, I regard the group to be well-positioned to grow its business for the foreseeable future. Yet, it is facing important challenges ahead, including its significant loss-making position and intensifying competition from other Chinese companies.

Therefore, in the coming months I expect the IQ stock price to be a battleground between long-term investors and short-term traders. It is likely to find bids if it goes below $20. On the other hand, $22.50 level is likely to act as resistance.

Thus, investors should be ready for daily price fluctuations as well as high volatility in the coming weeks, especially as the company gets ready to release Q4 earnings. Although I’d urge you to carefully consider both the risks and rewards before taking a position in IQ stock, long-term investors may see any further price declines as opportunities to go long.

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

Article printed from InvestorPlace Media,

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