When the coronavirus started making headlines, Chinese equities were hammered — everything from Alibaba (NYSE:BABA) to iQiyi (NASDAQ:IQ) and more. However, some have recovered, including IQ stock.
IQ stock caught fire in January, after a multi-month rally leading into the new decade. However, that flame was quickly extinguished on the coronavirus alarm. With shares recovering, it’s clear that, despite economic disruption all throughout China, investors are not worried about the same type of disruption hitting iQiyi.
Coronavirus
The coronavirus is having a major impact in China, the source of the outbreak for the virus. The most recent data shows over 45,000 infections and more than 1,100 deaths. Multiple cities are in a quarantine state, all sorts of factory and production facilities are closed, and travel is grinding to a halt.
Starbucks (NASDAQ:SBUX), Apple (NASDAQ:NKE), Disney (NYSE:DIS) and more many have said the virus will impact business as many have shut down locations in an effort to curb the spread of the virus. Macau, the largest gambling hub in the world, closed its casinos for 15 days.
This is a big deal for China, as the globe nervously keeps watch. At this point, it’s hard to tell what the economic impact will be, but there will be an impact because of it.
Now, one could argue (and many have), that the flu has killed and will kill far more people than the coronavirus. That is true, but the impact is mostly the same on iQiyi. That is, the “chill” factor.
When people are sick in the U.S., what do they do? Or more specifically, if there was a similar outbreak and quarantine effect taking place in America, what do you think people would be doing?
The answer: Netflix (NASDAQ:NFLX) and chill. Or more aptly, sitting at home streaming videos.
In China, the theory seems to suggest the same is true. Of course, better-than-expected preliminary results from Baidu (NASDAQ:BIDU) helped give the whole Chinese internet space a boost. In any regard, people are going to stay at home — many unable to work — and do things to entertain themselves. That includes streaming video, for which iQiyi is well positioned. I have routinely said that iQiyi is like a combination of Netflix and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube.
Valuing iQiyi Stock
The company does have a cost issue, in that it can’t seem to reign in expenses in a manner that is acceptable to investors. However, it does have growth. Last quarter, revenue grew just 7% year-over-year but topped $1 billion for the fourth straight quarter. User growth exploded more than 30% to 105.8 million, with more than 99% being a paying subscriber.
The downside here is that iQiyi missed earnings expectations for the second straight quarter and has done so in six of the last seven quarters. If iQiyi can get its costs under control, this stock could have major upside.
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According to iiMedia Research, the online streaming industry in China should continue to grow. In 2019, the number of online streamers increased approximately 10% to 501 million people. That’s roughly 50% more than the entire U.S. population, by the way. Estimates call for about 5% growth in 2020 to 524 million people.
As for iQiyi specifically, analysts expect revenue to grow 14.5% for 2019, then accelerate to 17.6% in 2020. On the downside, they still expect a loss of $2.10 per share this year and $1.41 per share in 2020. On the plus side, those are year-over-year improvements from 2018 to 2019, and 2019 to 2020. It also gives management the chance to achieve better-than-expected results.
Trading IQ Stock
We can theorize “iQiyi and chill” all we want, but all we have to do is look at the chart to realize that it’s in play. The stock quickly sold off in mid-January on the headlines, but then investors began to bid it back higher. That’s even as Asian equity markets took a tumble (although, IQ stock trades in the U.S.).
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In any regard, it’s since rebounding from the 50-day moving average and is now clearing $25, a significant level on the charts. Keep it simple from here. Above $25 puts $28 on the table. Should IQ stock lose the $25 level, it puts the 50-day moving average and uptrend support (blue line) in play.
In December we saw a change in character in IQ stock, when bulls finally reclaimed the 200-day moving average and now have momentum on their side.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long DIS and SBUX.
