Why iQiyi Stock Should Climb Higher Again Soon

After a robust start in the public markets following its March 2018 IPO, iQiyi (NASDAQ:IQ) has proven itself to be a very troubling stock. In fact, iQiyi stock has spent most of its time in the doldrums, short of a few bursts higher.

This Is Why iQiyi Stock Should Climb Higher Again Soon
Source: NYC Russ / Shutterstock.com

This one is very interesting. On the one hand, iQiyi is called “the Netflix of China.” While the latter has gone on to hit new all-time highs after an explosion in subscribers, iQiyi stock has not followed suit.

If it’s the Netflix of China, why is it not rallying? Well, that’s assuming we exclude the action from June 16, when the stock rocketed higher by almost 40% at one point and closed higher by more than 25%.

As a second wave of the novel coronavirus threatens to sweep around the world, coronavirus stocks are back in play. Evidently that includes IQ stock, although the stock couldn’t maintain momentum last time.

The Coronavirus and iQiyi Stock

chart of iqiyi stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com 

Investors are asking why iQiyi shares exploded higher earlier this week. Not long ago, the stock was treading water near the lower end of its trading range, as buyers appeared to be on strike.

The technicals did improve ahead of the move, but nothing on the charts signaled a one-day move of such magnitude was on deck. That’s because shares didn’t rally on technical reasons, they rallied on the news.

Beijing is closing gyms and pools, suspending schools and restricting movement in certain neighborhoods. In essence, the fear of a second wave is becoming a reality in China’s capital.

To little surprise, that has virus plays like iQiyi rallying, as investors speculate that streaming entertainment will be in higher demand. It goes beyond that though, as investors are also speculating that Tencent (OTCMKTS:TCEHY) may be interested in taking a majority stake.

So between M&A and rising Covid-19 cases in China, there are clearly reasons for the sudden burst of bullishness. The question now becomes, can it continue?

Look at the chart above. Notice how IQ stock peaked on Feb. 10, as attention shifted from China’s coronavirus situation to the rest of the world. Then iQiyi sold off with the rest of the U.S. stock market. It didn’t recover in the later months like Netflix, Amazon (NASDAQ:AMZN), Zoom Video (NASDAQ:ZM) and others.

Instead, it languished. That’s the risk this time around too, although I do believe in iQiyi’s long-term potential. Streaming video is only going to grow, both domestically and internationally. With such a large audience — remember, China has a population of almost 1.4 billion people — iQiyi has a huge target market.

Let’s see if the stock can maintain some of these recent gains.

Diving Deeper on iQiyi

When iQiyi reported its most recent quarter, the company had almost 120 million subscribers. That’s up 23% year over year and up 12 million from the prior quarter. More than 99% of these subscribers were paying members.

While iQiyi stock is often compared to Netflix (NASDAQ:NFLX), it’s more like a blend between Netflix and Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube. In other words, iQiyi generates revenue from both advertising and membership services. It also generates some revenue from content distribution, although a bulk of its sales come from those first two outlets.

That would help explain why a 23% rise in subscribers only translated to a 9% bump in revenue. That’s as ad spending slowed in the first quarter, something we saw across the board in digital advertising.

For the year, analysts expect revenue growth to accelerate vs. Q1, with full-year growth of 11.7%. If the digital ad space accelerates faster than expected, this should bode well for iQiyi and a handful of others. In 2021, forecasts call for almost 20% revenue growth.

On the downside, iQiyi stock is not yet profitable. But if the company can tighten up on expenses and accelerate revenue growth, shares could have upside.

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.

Article printed from InvestorPlace Media, https://investorplace.com/moneywire/2020/06/why-iqiyi-stock-should-climb-higher-again-soon/.

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