IQiyi (NASDAQ:IQ) is not “the Chinese Netflix (NASDAQ:NFLX).” IQ stock is not Netflix at all. But that’s not necessarily a bad thing. Netflix, as presently constituted, might not be a good fit for China.
That’s because Chinese people are highly mobile when it comes to the internet. Their screen of choice is a phone. Not a tablet, not a PC, and certainly not a TV, a phone. With a tiny screen, and wireless connections.
IQ is premised on serving that market. IQiyi’s service is ad supported. It’s an impatient market so IQiyi content is short, punchy, more like YouTube. It’s also highly interactive.
It’s just not Netflix.
What IQiyi Is
IQiyi delivered its latest quarterly report May 16, a net loss of $270 million, 35 cents per share, on revenue of $1 billion.
That’s not terrible because growth was 45% from a year earlier, and subscription revenue (which it calls membership fees) was up about 65%, and now represents half the total. Revenue from advertising was basically flat.
The market’s reaction was to sell IQ stock, and it’s now down 9% from where it was when the earnings came out. Speculators mistook the company’s moves toward interactivity, games and original content for confusion.
But IQiyi management is not confused. During the quarter they overtook Tencent Holdings (OTCMKTS:TCEHY) for the lead in the Chinese streaming market, pushing a unit of Alibaba Group Holding (NASDAQ:BABA) to third. It’s a very tight race, and the fact that a $13 billion company is beating two giants worth over $400 billion each shows they know what they’re doing.
Put most simply, IQiyi is an entertainment company catering to young Chinese who grew up in a time of rising prosperity but are working hard and must play hard as well. Nearly every Chinese city has the rush of Manhattan Island. People are in a hurry. They’re in a state of constant interruption and stimulation. This is not “Netflix and chill.”
What IQiyi Does
Chief content officer Wang Xiaohui describes IQiyi as a “one stop entertainment platform,” and entertainment can mean long-form movies that are relevant to the Chinese experience, immersive video games, even e-books like those found on the Amazon’s (NASDAQ:AMZN) Kindle. The idea is that a book or game with traction can become a video, and vice versa, with IQiyi squeezing every ad dollar and view it can get out of this original content.
IQiyi had 98 million subscribers at the end of the last quarter. Compare that to Netflix’ 150 million, then note we’re talking about a single market. IQiyi memberships don’t cost much, the 98 million bringing in about $500 million, but the idea is to build a host of other online subscription revenue, advertising revenue, and licensing opportunities as well. (Netflix relies entirely on subscription revenue.)
The Bottom Line for IQ stock
If you’re buying IQ stock today you’re betting that its managers know that their big new “original content” budget can create not just shows for tiny screens, but enduring franchises that can be monetized in several ways.
IQiyi wants to break out its best content into movies for a market worth $9 billion, into streaming subscriptions for a Chinese market as big as its pay TV market, into games and even virtual reality experiences.
Titles like Beijing Love Story, Wolf Warrior and Detective Chinatown don’t have to travel to be profitable. They just need to be constantly renewed, like the Star Wars franchise.
That’s the strategy, anyway. If you like it, buy IQ stock. Just don’t call it Netflix.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
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