If you’re looking for a stock to buy that will be able to withstand the uncertainty of a U.S., China trade war, Chinese video-streaming company iQiyi (NASDAQ:IQ) is not the one. This is true despite the fact IQ stock now trades below its $18 IPO price from March 2018.
Since then, IQ has dropped 17%. As I write this, it’s trading around $17.17, about 13% away from the $15 buy zone. Another 20% decline in its share price and iQiyi stock will be irresistible to investors.
It’s Very Short
My InvestorPlace colleague Josh Enomoto recently reminded IP readers that 21% of iQiyi’s float is held short. That’s more than $1.2 billion in shorted IQ stock, a number that’s even more frightening when you consider that it is a larger dollar amount than iQiyi’s top-line sales from Q1 2019.
Josh pointed out that many of the shorts are betting against iQiyi because its revenues are thought to have peaked a year ago in Q2 2018. The company announces its second-quarter results on Aug. 19. A better-than-expected result will crush the shorts and a weak quarter will most definitely knock IQ down to below $15.
My argument against the shorts is that as long as iQiyi continues to grow its revenue from membership services by more than 60% a quarter, eventually, like Netflix (NASDAQ:NFLX), it will become profitable.
“The revenue trajectory is undeniably impressive, and few doubt the analysts’ near-term outlook. What’s largely being overlooked is the analyst community’s expectations that revenue growth will continue to grow while relative spending growth on content slows,” stated InvestorPlace feature writer James Brumley July 22. “Though still expected to be in the red, the pros are looking for losses to shrink this year and next, dramatically improving the per-share profit figures for iQiyi stock.”
While not every business is scalable, Netflix has proven that video streaming is one of those business models that improve with size. I don’t see iQiyi being any different. Eventually, it will have enough Chinese subscribers to deliver profits to the bottom line.
In the meantime, IQ stock continues to fall because investors see slowing growth in China and assume that the slowdown to 6% will hurt iQiyi.
Most countries would beg for 6% GDP growth, but everything is relative, I guess. China is not growing fast enough and that’s hurting IQ’s story for investors.
The Bottom Line on IQ Stock
Most of my InvestorPlace colleagues are suspicious of iQiyi stock.
I won’t get into specific reasons why they are, but the rationale is understandable: iQiyi doesn’t make money. Any time you buy the stock of a money loser, you’re hoping that other investors will focus on the massive growth in sales and give the bottom-line losses a pass.
Sometimes it happens … sometimes it doesn’t.
In the end, I don’t think you should own stocks like IQ if you’re not an aggressive investor who’s used to volatility and understands that scaling a business takes time and money.
Profits aside, iQiyi has a nice balance of revenue streams, and even though membership services account for almost 50% of its overall revenue, its other means of generating sales ensures that it keeps growing at a reasonable place.
As Brumley stated, iQiyi is doing everything it can to grow, but investors don’t seem to be noticing.
If it drops another 20%, I’m confident they’ll start to take a closer look.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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