Chinese video streamer iQiyi (NASDAQ:IQ) has been a roller coaster since it was spun-off from Baidu (NASDAQ:BIDU) in late march. At first, IQ stock staged a powerful rally, going from $18 to $46 (as of mid-June).
But, unfortunately, the good times would come to an abrupt end. Note that IQ stock is now at $25 (although, market cap is still a hefty $19 billion).
So why all the volatility? And is now a good time to consider a purchase? Well, let’s take a look at three reasons why IQ stock is feeling the pressure:
#1 – Lofty Expectations
IQ stock is often referred to as the Netflix (NASDAQ:NFLX) of China. And, yes, this is certainly a nice compliment. But it also has a downside — that is, the label essentially builds up expectations to high levels.
Besides, the IPO market has been frothy lately. It seems like any tech company has been able to post substantial gains, such as Zscaler (NASDAQ:ZS), Zuora (NYSE:ZUO) and DocuSign (NASDAQ:DOCU).
In other words, Wall Street has set the bar fairly high.
Just look at the second quarter earnings report for IQ. While the company had a good performance, it was still not good enough. The revenues were in-line and the earnings missed. As a result, IQ got hit with large amounts of selling.
#2 – Turbulent Geopolitics
For the year so far, Chinese equity prices have been in the bear mode, as seen with the performances of the Shanghai and Shenzhen indexes. There has also been a decline in the yuan versus the US dollar. Even top-notch Chines companies like Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY) have not been immune from the pressures.
Why the problems? First of all, there has been a general slowdown in the Chinese economy, as well as challenges in making the transition to increased domestic consumption. But, of course, the trade dispute with the US has been a major wildcard. And, for the most part, there is little evidence that things will change anytime soon.
#3 – Tough Competition
The Chinese Internet market is intensely competitive. There
is also the unpredictability of the governmental authorities. A new regulation can have a major impact on a company, especially one that relies on content.
As for IQ, it definitely has to fend off major rivals, including biggies like BABA and Tencent. They have huge user bases, well-known brands and enormous resources. What’s more, these companies see streaming as a strategic market opportunity.
Bottom Line on IQ Stock
Despite these issues, IQ is still a fast-growing company. In the latest quarter, revenues jumped by 51% and the subscriber base spiked by 75%. The company also has multiple revenue streams, which include advertising and subscriptions. If anything, IQ is really a blend of NFLX and Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube.
A key to the success has been a strong focus on quality content. For example, last year five out of the top ten original variety shows were from IQ. Then there is the drama The Lost Tomb, which has logged over 4 billion video views.
IQ has also been aggressive in finding distribution. No doubt, there is the strong relationship with BIDU. But IQ has also forged an alliance with JD.com (NASDAQ:JD), which continues to gain traction.
Yet, in the short-run, there could easily be more downside with IQ stock — which is normal when an IPO loses its momentum. Again, the geopolitical situation in China does not appear to be temporary, which is likely to weigh on the growth of the economy. In other words, it’s probably best to wait to get a better price on this one.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
