One of my personal favorite IPOs this year — which also just so happens to be one of the most successful – has recently hit a speed bump. iQiyi (NASDAQ:IQ), often referred to as the Netflix (NASDAQ:NFLX) of China, soared an incredible 189% from its debut on March 29. But after hitting a high on June 20, the stock has lost about one-third of its total value.
There are three factors that have led to IQ’s rough couple of weeks – a trade war with China, the broad Chinese stock index falling into a bear market and the fact that IQ was due for a pullback. The good news is that two of those three will likely be short-lived.
The first is the trade war. I expect the fears and uncertainties will subside in the coming weeks if both sides of the aisle start to cool down their rhetoric and back off on tariffs. We’ve seen this before with President Donald Trump, who has a very distinct way of negotiation. He goes big at first and then works from there to find a place of agreement with the other party. That will be the end result with China.
Regardless, IQ is almost completely sheltered from any potential tariffs since it currently works solely within China’s borders.
Second, I suspect we’re much closer to the end of IQ’s pullback than the beginning. A healthy period of weakness following a parabolic move to the upside is normal, and that’s exactly what we’re seeing here. The stock has strong support between $27 and $30 that should hold up well amid any additional decline.
The Chinese bear market is the one factor that may continue for the next couple of months. However, even if that’s the case, it doesn’t mean that it will directly affect IQ stock for the long term. I really do not anticipate much more than another 10% on the downside for Chinese stocks as a whole, so as a long-term investor, I view the country as representing a solid buying opportunity.
The Sky is Endless for IQ Stock
There are many things that attracted to me to IQ in the first place, but what has really captured my attention is its long-term growth potential. The company’s numbers are beyond attractive, as it trades at a market cap of about $23 billion whereas NFLX is up at $172 billion. Of course, Netflix has a larger subscriber base and more sales than IQ, but the 7.5X richer valuations is a big gap.
The biggest argument here is that NFLX is offered in more than 150 countries while IQ is just in China. I understand the concern, but keep in mind that China’s population is 1.38 billion. That is large enough to warrant a much higher valuation down the road.
I believe the upside potential here is nearly endless, but I’m not ready to buy IQ just yet. I am keeping a very close eye on it, though, as I suspect the right opportunity is just around the corner.
Matthew McCall is the founder and president of Penn Financial Group, an investment advisory firm, as well as the editor of FUTR Stocks and the ETF Bulletin. Matt just launched two new investment advisories focused around the “next” generation investing theme. His trademark three-prong investing approach targets the mega-trends old Wall Street is missing out on. Click here for more information on the “NexGen” Experience.
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