Iqiyi (NASDAQ:IQ) finally found some buying on Monday. After a rough series of trading days, IQ stock rebounded almost 4% on Monday. The rally came because Jefferies started coverage of the company with a $33 price target; that’d be a more than 20% gain from the current share price.

And there’s good reason to think that this may happen. I previously suggested that IQ stock could hit $50 this year if the company beat earnings. Instead, shares have skidded.

The losses, however, have come due to factors largely outside of the company’s control. Once these abate, Iqiyi stock could rally in a hurry.

Lock-up Expiration Led to Selling

Traditionally, after an IPO, regulations prohibit insiders from selling any more stock for a certain number of days. In the case of Iqiyi, the lockup period lasted 180 days. It expired on Sept. 25. Probably not coincidentally, IQ stock fell more than 10% in the trading sessions leading up to that date as speculators sought to get out of the way of more potential selling.

However, the stock hit support around the $25 level and appeared to be ready to bounce. That was, until the latest round of China worries, fed by concerns that Chinese operatives may have hacked American tech companies’ sensitive server hardware.

In any case, the lock-up period was potentially a major overhang for IQ stock. The company’s major backer and controlling owner, Baidu (NASDAQ:BIDU) has filed its intention to sell up to 7.2 million IQ stock shares after the lock-up period expires.

Notably, this is slightly less than Baidu purchased during the IPO, despite already controlling the company. By buying IPO shares at $18 and selling in the mid-to-high $20s now, it appears that BIDU is simply making a shrewd trade.

However, some observers may see Baidu selling as a sign of weakness. That despite Baidu being their long-time backer, and maintaining their core controlling stake in Iqiyi despite this marginal stock sale. All in all, this selling is not a major concern. Ignore the noise.

Chinese Stocks Getting Worse

Arguably, the bigger problem for IQ stock now is the general problem with Chinese internet companies more broadly. The sector has been getting crushed over the past few months.

The big dogs of the space, including Alibaba (NYSE:BABA), JD.com (NASDAQ:JD), and Tencent (OTCMKTS:TCEHY) have all been making new 52-week lows recently. As they go, so go the smaller Chinese internet companies.

Why is the sector tanking? Several reasons. For one, Trump and China continue to escalate their trade war rhetoric. The U.S. is adding additional measures that have angered China.

These included a new law passed on opioid production which appears to target Chinese producers. On top of that, the Bloomberg story about China hacking servers, mentioned above, sent a major chill through the internet industry.

We have to combine that with problems domestically in China. There appears to be a growing wave of concern above leverage and bad loans in the real estate market there. The Yuan has been devaluing throughout 2018, likely as a result of Chinese people moving their money offshore.

All these concerns have led Chinese stocks, both listed on their exchanges there, and here in New York, to plunge. To start this week, Chinese stocks fell more than 3% on their exchanges as selling pressure has accelerated.

IQ Stock: Core Bull Thesis Hasn’t Changed

At the time Iqiyi launched its American IPO, the story was that the company could be the Chinese version of Netflix (NASDAQ:NFLX).

Given China’s tendency to keep foreign competition out, we’ve gotten a bunch of “Chinese version of X” investments over the years. While not all of these have been winners, investors who have picked wisely have made a fortune buying these sorts of companies.

As such, Iqiyi is definitely worth paying attention to. The company launched in 2010 as a feature of Baidu. Over time, it has become more independent, culminating in the recent IPO, but Baidu is still an integral backer and driver of traffic to the firm. Originally, like with Youtube, Baidu built the Iqiyi business on advertising.

However, Iqiyi has now learned from Netflix and is rapidly pivoting to subscriptions. Remember that Wall Street absolutely loves recurring revenue now.

So as Iqiyi keeps ramping up this business, the potential is growing for IQ stock to receive a major re-rating higher. Last quarter, subscription revenue grew at a more than 60% rate.

Overall, the company is up from 5 million paying subscribers in 2015 to more than 67 million now. It’s far from Netflix’s size at this point, but the growth trajectory is similar.

IQ Stock: Remain Bullish, but Mind The Competition

Events that are not material to the long-term thesis for IQ stock have caused the recent volatility in the share price. Ultimately, it matters little what sort of trade deal the U.S. and China reach (or don’t reach) to Iqiyi.

The company is selling ads and subscriptions to Chinese people, after all, and not foreigners. And the share lock-up is a short-term trading event that investors will forget soon. If Baidu stops supporting Iqiyi, that would be a major problem, but it is unlikely.

No, the real concern for Iqiyi is that well-funded competition from Tencent or Alibaba beats out Iqiyi in developing the platform with the most content and subscribers over time.

However, that battle will take years to play out. Little has changed since IQ stock traded above $40. If IQ stock becomes anything like the Netflix of China, it will be worth far more than the $20 billion the market values it at today.

At the time of this writing, Ian Bezek owned JD stock.