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Economy, Politics Will Always Preclude High Valuations in iQiyi Stock

Will Healy

Dashed hopes have come to define iQiyi (NASDAQ:IQ) stock since its March 2018 IPO. Three months after its debut, iQiyi stock had risen by more than 150%. However, within six months, it had given back all those gains, and then some.

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IQ stock doubled in price between December and February, but now the equity has again fallen back towards the original IPO price.

iQiyi will continue to benefit from significant revenue growth. However, political and economic conditions will prevent those gains from boosting IQ stock.

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What’s Good for Iqiyi Does Not Seem to Help IQ Stock

Many compare iQiyi to a similar U.S.-based company, Netflix (NASDAQ:NFLX). However, the platform seems to come closer to Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) YouTube with a content budget.

Admittedly, they have brought creativity by incorporating editing software from Adobe (NASDAQ:ADBE) to change stories and plot lines. As I mentioned in a previous article, they want consumers to think of them as the next Disney (NYSE:DIS).

However, this creativity has failed to translate into massive growth or stock gains. China may hold the advantage of operating in a developing market with a population almost four times as large as that of the U.S. However, as our own Tom Taulli points out, it has “lost its mojo.” Even after hitting the 100 million subscriber mark, analysts expect year-over-year revenue growth to slow from 29.9% in the last quarter to about 15.2% in Q2.

iQiyi also faces increasing competition from giants such as Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY). Both are large, profitable companies that can fund a content war. IQ stock will have to rely on outside funding for such endeavors. Analysts expect iQiyi to lose $1.81 per share this year, and Wall Street does not predict a profit until at least 2021.

Also, the performance of IQ stock has likely dispelled any notions that iQiyi will become a second chance for those who missed the move higher in Netflix stock. More than 16 months have passed since Baidu (NASDAQ:BIDU) spun it off into a separate company. IQ currently trades at just under $19 per share, barely above its IPO price. At a price-to-sales (PS) ratio of only 3.5, traders appear in no mood to bid iQiyi stock to Netflix-like valuations.


Numerous Factors Hold Down IQ Stock

I think IQ stock fails to gain that kind of traction for several reasons. Netflix operated for years by staying ahead of its competition. iQiyi has no such benefit. Moreover, ad-related revenue growth has slowed considerably. Many businesses have not taken with the ad platform, and it has barred some from its ad platform out of fear of regulatory authorities.

Still, I think the overriding factors are the macroeconomy and geopolitics. A slowing economy might presumably help iQiyi as fewer people working would probably bring higher viewership. However, stocks overall tend to underperform in a slowing economy.

Moreover, we must remember that so-called “Chinese stocks” are actually Cayman Islands-based holding companies who represent Chinese firms. As a result, traders have not bid these stocks as high as their American counterparts. This does not affect only IQ. Alibaba stock has faced a similar struggle. That trend could worsen if the economy slows.

The Bottom Line

Investors may continue to regard iQiyi as the “Netflix of China,” however, political and economic conditions will deter any Netflix-like valuations in IQ stock. iQiyi has reached its 100 million subscriber milestone, and revenues continue to grow. Some believe this will turn iQiyi into a profitable company by 2021.

That has not translated into significant gains for IQ stock. Many cite declining ad revenues and competition. The ongoing trade war also continues to hurt Chinese stocks and the Chinese economy overall.

Still, I think traders cannot fully get past the fact that IQ stock is not truly stock in iQiyi. I do not see a significant chance on iQiyi reneging on the agreements that keep IQ stock afloat. However, as long as iQiyi stock remains a proxy, I see its growth potential as limited.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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