iQIYI Stock Is Facing Multiple Headwinds Ahead of Its Results
China-based stocks are not performing well for investors these days. When the U.S. made good on its word to slap tariffs on China, investors punished any company based in the Asian country. On Oct. 30 after the market closes, iQIYI, Inc. (NASDAQ: IQ) is slated to report its quarterly results. After a number of U.S.-based tech stocks warned about a slowdown in China, does iQIYI stand a chance of reporting strong results and can IQ stock rise in the wake of the results?
During the week of Oct. 22, STMicroelectronics N.V. (NYSE: STM) confirmed that a slowdown had begun in China, hurting its outlook. Citing weaker chip prices which could be partly caused by slowing activity in China, Western Digital Corporation (NASDAQ: WDC) lowered its overall demand expectations.
So the chances of IQ raising its forecast are low. Even if the internet information provider grows its earnings per share by over 100% this year, its earnings over the next five years will likely still slow to around 50%.
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iQIYI’s multi-year deal with Viacom’s (NASDAQ:VIA,NASDAQ:VIAB) Nickelodeon probably will not generate meaningful revenue just yet. Under the deal, iQIYI gets exclusive rights to stream Nickelodeon’s Mandarin and English programming to consumers in China. The content is geared to kids, so the transaction should allow iQIYI to become popular with very young Chinese citizens.
The Valuation of IQ Stock
Despite the roughly 33% drop of IQ stock this quarter, the shares are still up about 45% year-to-date. Yet the stock is still well below the average analyst price target of $34.67, according to tipranks. If IQ stock reaches the target, it will have risen about 55% from current levels. And recently, Karen Chan, an analyst at Jefferies, wrote that iQIYI could lead the online streaming revolution in China and become the country’s version of Netflix, Inc. (NASDAQ: NFLX).
But if the Chinese economy does meaningfully slow, IQ stock will suffer because advertising is generating a great deal of its revenue growth. In Q2, the company reported that its overall revenue had risen 51% to RMB 6.2 billion due to the strength of its subscriber fees and advertising. Online advertising revenue came in at RMB 2.6 billion and grew 45% year-on-year. Right now, it’s very difficult to assess the health of the Chinese digital ad market.
The Outlook of iQIYI Stock
iQIYI earnings could easily disappoint the Street, and investors are very skittish about Chinese stocks, since their volatility has risen significantly in recent months. But on the other hand, if IQ’s management continues to perform well, which it has done since the company’s IPO, then IQ stock may start moving up again. But at any rate, iQIYI stock is definitely not currently a good fit for risk-averse investors.
As of this writing, the author owns shares of Viacom stock.
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