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Can iQiyi Stock Get Its Mojo Back?

Tom Taulli

The IPO market has been strong, but iQiyi (NASDAQ:IQ) stock has not joined the party. Since becoming public last year, the shares are up a mere 6% or so, even though the company is often called the Netflix (NASDAQ:NFLX) of China.

The Near-Term Outlook of iQiyi (IQ) Stock Is Marred by Challenges

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But with expectations kind of soft for IQ, could this be a good time to buy IQ stock? Or should investors hold off for now? Well,IQ stock is certainly showing signs of momentum.

During the quarter, IQ did report a big-time achievement: IQ’s subscriber base exceeded 100 million for the first time.

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Here’s what the CEO and founder of IQ, Dr. Yu Gong, said: “Leveraging our exceptional capabilities in producing original content and deploying innovative AI technology, we have achieved remarkable membership conversion through our relentless efforts to cater to the diverse entertainment needs of our users and optimize their experience on our platform. Chinese consumers are increasingly willing to pay for high-quality content, a trend underpinned by the rapid evolvement of the entertainment industry and technology in China.”

And the company had some other notable highlights during the quarter:

  • At the Mobile World Congress (MWC) in Shanghai, the Central Radio and TV Station, Shanghai General Station and the CCTV Financial Channel jointly granted IQ the “Mobile Internet Innovation Pioneer Award.” IQ received the award mainly due to its use of cutting-edge AI (Artificial Intelligence) and VR (Virtual Reality) for content creation. After the news of the award was released, IQ stock jumped by 10%.
  • IQ launched an interactive video-platform plug-in that can be utilized in conjunction with video-editing software from Adobe (NASDAQ:ADBE). Using IQ’s plug-in, a producer can easily change plots and edit story lines
  • IQ hosted the 2019 VIP Fan Carnival in Shanghai, which included more than 60 celebrities and 7,000 fans. Held in partnership with Weibo Corp (NASDAQ:WB), the event attracted about 1 billion views.

But IQ’s  growth is still likely to meaningfully decelerate. For example, in Q2  analysts, on average, expect its  revenues to climb by 9% year-over-year to $1.02 billion. In Q1, the company’s top line jumped 43% YoY. The company’s losses are also expected to continue. Analysts’ average estimate is a loss of 44 cents per share of IQ stock (during the same period a year ago, the loss was 45 cents per share of IQ stock).


The Issues With iQiyi Stock

IQ faces some tough challenges. One hurdle is the wild card of regulation. Keep in mind that the Chinese government has recently instituted new requirements for online video – with a focus on historical dramas — which could hamper IQ’s growth and hurt IQ stock.

Next, the competitive environment remains intense. IQ must fight against rivals like Tencent (OTCMKTS:TCEHY) and Alibaba (NYSE:BABA), which have massive platforms and enormous financial resources.

And while IQ has a hefty subscription base, the monthly payments are only$1.50 to $2 a month (IQ, however, also generates ad revenues). Furthermore, another InvestorPlace columnist, Josh Enomoto wrote: “Moreover, from a historical perspective, the Chinese don’t value media content as much as we do. For decades, China was ground zero for content piracy. Guess what? Nothing has changed. Under this context, I just don’t see Chinese consumers forking over their hard-earned yuan for something that they can get for free. That poses major challenges for IQ stock.”

In the meantime, IQ continues to spend significant amounts on original content. And those costs are likely to escalate, as IQ is planning to develop movies.

In other words, it could be tough for IQ to become profitable. That is why the company has continued to raise money by a variety of means, including its recent $1 billion convertible bond offering. That move was not encouraging,  as it came relatively soon after the IPO of IQ stock.

The Bottom Line on IQ Stock

Even though the expectations for iQiyi stock are far from robust,  the shares may not be worth buying right now. The company faces some tough headwinds – and they could easily cause its guidance to miss consensus expectations. So for now, investors shouldn’t rush to buy IQ stock.

Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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