On Jan. 7, Chinese video streaming service iQiyi (NASDAQ:IQ) announced a strategic partnership with Astro, a leading Malaysian satellite television operator. Under the deal, IQ will market its platform to Astro’s customer base.
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As IQ’s growth slows, its expansion outside China was inevitable. However, at this point, it’s hard to know if the move indicates that IQ stock is worth $30 per share or $15 per share.
Here’s a look at both sides of the argument.
IQ Stock Is Worth $30 Per Share
The lack of movement by the company’s stock since the partnership was announced suggests that investors aren’t reading too much into the situation. Instead, they’re opting to patiently wait for IQ to build a business in Malaysia.
Since it’s taken iQiyi more than ten years to convert its nonpaying Chinese users to paid memberships, it’s unlikely that it will generate meaningful revenues from Malaysia for at least the next 12-24 months.
Is IQ just trying to divert attention away from its domestic business, which is slowing significantly? I don’t know the answer to that.
What I do know is that IQ will have to spend a great deal of money to boost IQ stock by capturing market share in China’s smaller cities. iQiyi doesn’t necessarily have that kind of money.
For IQ, grabbing some of the low-hanging fruit in Malaysia seems like a better proposition than banging its head against the proverbial Chinese Wall.
InvestorPlace columnist Jonathan Berr made an excellent point about iQiyi in December, stating that the video streamer’s ad-supported service is a great way to keep users viewing its content, instead of moving to a competing service. He added that Netflix (NASDAQ:NFLX), which is scrambling to hang on to its U.S. fan base, should offer an ad-supported service.
Although the cost of expanding outside of China could be burdensome for IQ at this point of its development, I don’t think it had any choice. After it reported single-digit-percentage revenue growth for the third quarter, it had to do something.
By being bold and proactive, iQiyi CEO Tim Gong Yu is sending a message to shareholders that he’s got a plan for global domination.
In the meantime, IQ stock has traded above $20 for more than a month, which suggests that investors expect the company to report decent fourth-quarter results when they are slated to be unveiled in late February.
IQ Stock Is Headed Back to $15
In late September, I advised investors to wait for IQ stock to fall to $15 before buying the shares. I thought IQ would drop to $15 after it announced its Q3 results on Nov. 6. IQ stock fell as low as $15.12 on Oct. 2. Since then, it’s gained 60%.
To fall back to $15 before the end of 2020, it would have to lose nearly 40% of its value. In 2018, it fell from $40 in June to below $15 in December. That was a 63% decline in just six months.
So IQ stock could potentially fall to $15 this year.
In September, I wrote that IQ’s Q3 guidance, which called for revenue growth of between 4% and 10%, was conservative.
To my dismay, its Q3 sales grew 7%, precisely the midpoint of its guidance. That’s not horrible, by any means, but it certainly does not justify the valuation of IQ stock, which is trading at 4.2 times its sales. By comparison, Netflix trades at 8.1 times its sales. NFLX, however, generated operating profit of $2.4 billion over the 12 months that ended in September, while iQiyi lost a boatload of money.
With IQ stock at $24, I think its downside risk over the next six months is greater than its potential gains. If iQiyi delivers another stinker of a quarter in February, you can be sure IQ stock will fall below $20.
At this point, I would wait until after IQ’s earnings to buy IQ stock because right now IQ is looking more like a $15 stock than a $30 stock.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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