iQiyi Inc: Chinese Streaming Stock Soars on Earnings Beat, Still Lots of Room To Run

iQiyi Stock Pops by 15% But Is Still 31% Below 52-Week High

iQiyi Inc (NASDAQ:IQ) stock got a big jolt on November 7 after the company announced a third-quarter earnings beat. IQ stock soared more than 15% to a two-month high.

Despite the strong upward move, iQiyi stock still has lots of room to run, needing to climb about 44% to get back to its February 52-week high of $29.18 and needing to climb 130% to return to its June 2018 all-time high of $46.23.

Whether iQiyi Inc can hold onto its recent stock gains remains to be seen, but the company’s top-line financial growth in the third quarter and its encouraging outlook points to solid stock-price growth over the coming quarters.

How solid is a matter of opinion. Of the 21 analysts that have provided a 12-month price forecast, the median price target is $130.00, which suggests a 540% increase from the current price of about $20.30 per share. The high estimate is $233.00, which points to an eye-watering gain of 1,0548%.

Even the low estimate of approximately $91.00 would translate to an increase of almost 350% from the current level.

Those estimates seem a little aggressive, which is not an adjective one would normally use to describe Wall Street analysts, but it does show that they are optimistic about the company’s long-term growth potential.

IQ Stock Overview

iQiyi Inc has been called the “Netflix of China.” And For good reason. It provides the largest TV and movie streaming service in China.

Unlike some streaming services that rely 100% on subscriber revenue, iQiyi operates on a subscription and ad-based revenue model. Its subscription base is massive, with 105.8 million subscribing members, of which 99.2% were paid subscribers. (Source: “iQIYI Announces Third Quarter 2019 Financial Results,” iQiyi Inc, November 6, 2019.)

In 2017, iQiyi’s original content accounted for six of the top 10 original online drama series and five of the top 10 Internet variety shows in China. (Source: “Company Overview,” iQiyi Inc, last accessed November 8, 2019.)

Also in 2017, the company was responsible for 42 of the top 50 drama series, variety shows, and films streamed on the Internet in China.

In addition to relying on subscribers for revenue, the company generates revenue from online advertising, live broadcasting, online games, IP licensing, online literature, and e-commerce.

In June, the company announced plans to expand its presence outside China, with the launch of a new streaming app that will deliver exclusive content on TV, on-demand, and over-the-top (OTT ) media in Malaysia. (Source: “Astro partners Chinese online video platform iQIYI for branded channel,” Marketing, June 17, 2019.)

(Source: “iQIYI, Inc. (IQ),” Yahoo! Finance, last accessed November 8, 2019.)

iQiyi Inc Reports Third-Quarter Earnings Beat

On November 6, iQiyi Inc announced that its revenue, for the third quarter ended September 30, increased seven percent year-over-year to $1.0 billion. (Source: iQiyi Inc, November 6, 2019, op. cit.)

The company reported a net loss of $516.0 million, or $0.70 per share. Wall Street was expecting the company to report a loss of $0.72 per share on revenue of $1.0 billion.

Of particular note, iQiyi’s total subscribers grew 31% year-over-year from 80.7 million to 105.8 million. This is the first time the company’s subscription business was responsible for more than half of its quarterly revenue.

Despite a challenging macro environment, management expects the company’s subscription business to be a key growth driver going forward.

Dr. Yu Gong, founder, director and CEO commented,

Leveraging our cutting-edge AI technology, we are continually fine-tuning our content offerings, optimizing our monetization efficiencies, and exploring potential new runways for future growth. With the rapid development of 5G, we believe there will be astonishing new opportunities ahead, and we will continue to push forward the convergence between technology and art to create deeper value and greater prospects for the future.

To that end, in the fourth quarter, iQiyi expects to report net revenues of between $960.0 and $1.0 billion, which represents a year-over-year increase of up to four percent.

On average, Wall Street analysts are looking for fourth-quarter revenue of $997.1 million. (Source: “iQIYI, Inc. (IQ),” Yahoo! Finance, op. cit.)

Analyst Take

iQiyi Inc is a streaming giant in China with great long-term growth potential. Not only is it home to some of the country’s top-streaming shows, it also has a massive footprint in a country that has shut the doors to Netflix and “YouTube.”

iQiyi still faces competition from other Chinese streaming services, but it is the biggest streaming company in the country and is expanding outside of its borders.

On top of that, iQiyi is getting more of its revenue from subscribers and is relying less on advertising. How this will play out amidst a slowing economy remains to be seen.

But with a growing middle class in China, it’s likely that Chinese viewers will be as resistant to cancelling their streaming subscriptions as Americans are. As mentioned, iQiyi’s subscription base increased 31% year-over-year, during a period in which the U.S. and China were entrenched in a trade war.