U.S. Markets close in 3 hrs 50 mins

What to Expect When iQiyi Reports Earnings

Danny Vena, The Motley Fool

You'd be forgiven if you haven't heard of iQiyi (NASDAQ: IQ) -- often referred to as the "Netflix of China." The company made its public debut in late March and has filed just one quarterly financial report since its initial public offering. It was spun off from Chinese search giant Baidu (NASDAQ: BIDU), which still holds a majority stake in iQiyi.

iQiyi is scheduled to release its second-quarter financial report after the market closes on Tuesday, July 31. Let's take a look at the company's most recent results and review a few metrics that will be of interest to investors.

Asian man and woman reclining on a couch looking at a tablet.

Image source: Getty Images.

An impressive first outing

For its freshman quarter, iQiyi reported revenue of 4.9 billion yuan ($777.6 million at the time), an increase of 57% year over year (in local currency), reflecting new accounting rules that dictate how companies account for equity security investments -- or stakes they hold in other companies. Its revenue growth was broad-based, increasing across each of iQiyi's major operating segments. Membership revenue soared 67%, online advertising jumped 52%, and content distribution climbed 44%, all in local currency and year over year. 

The bulk of iQiyi's revenue is divided almost evenly between subscriptions and advertising, which combine for more than 87% of the company's sales. The free, ad-supported model attracts the majority of the company's customers. Others pay subscription fees for access to the premium, ad-free content, which also includes exclusive programming not available to other viewers. The company generates additional sales from content distribution, online games, and merchandising.

For the second quarter, iQiyi expects net revenue in a range of 5.8 billion yuan to 6.04 billion yuan (between $857 million and $892 million at current exchange rates). This would represent year-over-year growth of between 42% and 48%. Analysts, for their part, are expecting revenue of 6 billion yuan (roughly $886.3 million) -- near the high end of management's estimates. 

iQiyi's biggest growth opportunity will be converting users from the free, ad-supported model to paid subscriptions. At the time of its IPO, iQiyi reported 50.8 million paying subscribers, and the company didn't provide an update when it issued its first-quarter financial release. Investors should be on the lookout for any update on subscriber numbers.

A word of caution

In its short life as a publicly traded security, iQiyi stock has bounced around like a pogo stick. In less than 90 days, shares soared as much as 184%, before falling 32% over the next 16 days. The stock is still up more than 100% from its price at the end of its first day of trading. Quite often, double-digit moves will not be accompanied by any news.

The company is not yet profitable, and doesn't expect to be for some time, as it is spending heavily to stock its content library. iQiyi has a frothy valuation, with a 12-month price-to-sales ratio of 8.5 -- significantly higher than the range of 1 to 2 which is considered good (or below 1, which is considered excellent). With a sky-high valuation like that, the volatility of this stock is likely to continue for the near future.

That said, for patient investors with a long time horizon, iQiyi has a shot at the streaming title in its native China.

More From The Motley Fool

Danny Vena owns shares of Baidu, iQiyi, and Netflix. The Motley Fool owns shares of and recommends Baidu and Netflix. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.