As Uncertainty Remains, Tread Carefully With iQIYI Stock Before Its Q4 Earnings

It may pay to wait until after the company's Q4 earnings to make a move

Should investors buy iQIYI (NASDAQ:IQ) stock before the company’s earnings? At lot is in play for the “Netflix (NASDAQ:NFLX) of China.” With the Chinese-based streaming giant due to report its Q4 results on Feb. 27,  it’s debatable how its Q1 guidance will be and how the guidance will affect IQ stock.  ]

IQ stock
Source: NYC Russ /

But the recent crisis has barely impacted the shares. While IQ stock dipped when the outbreak first made headlines, the shares have not lost too much ground in recent days. Perhaps, as InvestorPlace contributor Bret Kenwell suggested, coronavirus-related quarantines have resulted in more people chilling at home, watching iQIYI. Yet investors may only now be taking stock of the crisis’s long-term impact on the Chinese economy.

However, there are other things to consider. First, iQIYI is coming off of trade war-related ad revenue challenges. Secondly, there are concerns as to whether iQIYI’s growth will continue, both in smaller Chinese markets and overseas.

Given these factors, earnings could be a mixed bag for iQIYI. Let’s dive in and see why it may be best to wait until after the company reports its earnings to consider buying the shares.

Earnings and IQ Stock

Let’s look at last quarter’s results and see what could be in store for the company’s Q4 earnings.

iQIYI’s Q3 results were mixed. The company posted a slightly lower-than-expected loss, but fell slightly short of  analysts’ average revenue estimate.  IQ stock lost 70 cents per share in Q3, versus a projected per-share loss of 72 cents. The company’s revenue came in at $1 billion, versus analysts’ average estimate of of $1.02 billion.

Its Q3 revenue increased 7% year-over-year.  iQIYI’s subscriber revenue jumped 30% YOY, but a weak ad market affected its Q3 results. Specifically, its online advertising and content distribution revenue fell 14%  and 18%, YOY respectively.

The company’s sales growth has slowed in the past year. and its Q4 guidance calls for weak top-line growth. The company expects its sales to change between -2% and 4% YOY. It predicted that its Q4 revenue would be between $960 million and $1.02 billion.

However, IQ could surprise investors when it releases its Q4 results. The U.S.-China trade war was the major factor behind its weak Q3 advertising revenue. With this geopolitical issue on hold, the worst of the company’s ad revenue decline may be over. Even if its ad revenue business only stabilized in Q4, IQ stock could still rise.

On the other hand, iQIYI faces other issues. iQIYI has signed up nearly all the higher-income consumers in China. To accelerate its subscriber and sales growth, the company needs to increase its share  of smaller Chinese markets and of the markets outside of China.

In short, there are plenty of reasons why the company’s results could fall short of analysts’ average expectations. A recent guidance raise by its parent company, Baidu (NASDAQ:BIDU),  also sends mixed signals.

Reading the Tea Leaves From Baidu’s Results

Chinese search giant Baidu owns a majority of iQIYI’s shares. After Baidu raised its Q4 guidance,  iQIYI’s Q4 results could have been one reason for the increase. But iQIYI’s Q4 guidance was not raised.

iQIYI’s shares benefited from Baidu’s preliminary earnings announcement. But high expectations could already be priced into the streaming-video company’s stock.

Wait Until After iQIYI’s Earnings Before Buying IQ Stock

On one hand, there are positive factors at play for the company. The end of the trade war could boost advertising revenues going forward. The coronavirus could be a short-term headwind. But the company’s results could actually be boosted by the coronavirus quarantines.

If the company provides strong Q1 guidance, its shares could head higher after its earnings, even if its Q4 2019 numbers fall short of expectations.

Yet I remain on the fence regarding IQ stock. I wouldn’t say that the shares are “priced for perfection.” But, after rising from their October lows, there’s plenty of room for the shares to fall if the company’s  results fail to deliver.

Investors should wait until after the company’s earnings before buying the stock. If negative news hits the tape, investors could overreact, sending iQIYI to a more compelling entry point.

Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.







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