Even before the novel coronavirus pandemic, I was a big fan of iQiyi (NASDAQ:IQ). From just a basic level, the video streaming platform has completely transformed the way we consume content. But with the Covid-19 crisis sending people into the relative safety of their homes, IQ stock had an obvious catalyst. And as we found out early last week, I wasn’t the only one that saw value in it.
According to a stunning Reuters report, streaming competitor Tencent (OTCMKTS:TCEHY) approached iQiyi’s majority shareholder Baidu (NASDAQ:BIDU) about buying a stake in IQ. Although the size of the stake is not known nor what a Tencent deal with IQ would entail, this was a clear sign of intent. It also demonstrated that the Chinese content entertainment space is heating up.
Not surprisingly, IQ stock took off like a rocket, eventually closing up 26% on the news.
On the surface, this is of course great news for those who bought into the coronavirus-fueled weakness in iQiyi’s stock. However, several analysts have noted that a combined effort would make sense. While the pandemic has created a surge for in-home entertainment platforms, in the subsequent new normal, investors will be looking for sustainability of momentum.
Here, both companies can either hurt or help each other. An insider familiar with Tencent’s overture to Baidu stated that “[a] tie-up would improve their bargaining power when producing and purchasing content, and lower marketing costs that would otherwise be spent on grabbing users from each other.”
Since the announcement, iQiyi’s stock has come down from the peak highs. However, shares remain elevated well above longer-term averages, suggesting that there’s still room available for speculators.
Buyout Rumors Finally Put Spotlight on iQiyi
Although we’re finally seeing more conversation about iQiyi, for the investing faithful, it has been a long time coming. As you know, the coronavirus provided a dramatic lift for streaming companies like Netflix (NASDAQ:NFLX). What once looked like a disaster in waiting has blossomed into one of the top stories of 2020.
Theoretically, IQ stock should get some love as well. After all, analysts don’t call it the “Netflix of China” for nothing. Further, it’s not an unjustified or patronizing nickname. Both IQ and Tencent lay claim to over 100 million paid subscribers each. And with their native country boasting a population approximately four times that of the U.S., growth opportunities abound.
Yet a few days before the buyout rumor, iQiyi’s stock found itself down 22% for the year. Frustrating doesn’t begin to describe the situation. But thanks to Tencent, Wall Street is paying very close attention to IQ stock now.
Better yet, iQiyi isn’t just about entertainment content. According to SportsProMedia.com, a deal may include iQiyi Sports, a joint venture between Baidu and China-based Super Sports Media. Included within iQiyi Sports broadcasting rights are: La Liga (Spain’s top-level professional soccer league), China’s men’s national soccer team (for the qualifying rounds of the FIFA World Cup 2022) and the UEFA European Championship (rescheduled for next year).
If you’ve followed China’s sporting culture, you’ll know that the NBA ranks top in their citizens’ hearts. However, soccer has been making massive inroads. Indeed, behind the NBA is the internationally popular English Premiere League.
This proliferation of soccer is significant because it represents a mutually beneficial relationship between western advertisers and China’s desire for greater international prominence. No sport carries soccer’s global clout, which means iQiyi is very well positioned to profit.
IQ Stock Is Merely Finding Fair Value
Despite the many positives of IQ stock, many investors are reluctant to buy into an equity that has jumped double-digit percentage points in a single day. I get that. However, you have to look at iQiyi from a longer time horizon.
With all the recent rumblings behind the content streaming firm, I find it interesting that it is basically level with the start of the year. In my opinion, that doesn’t scream overvalued. Instead, IQ stock is merely trying to discover a fair valuation.
When you look at historical highs, iQiyi’s stock is still at a healthy discount. Therefore, even if you missed the boat on the exciting buyout rumors, I wouldn’t sweat it too much. First, Tencent has every reason to acquire iQiyi. Even if it doesn’t, this segues into my second point: iQiyi offers a compelling business all on its own.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.