Just a little over a month ago, iQiyi (NASDAQ:IQ) was untouchable. IQ stock ended 2018 at its lowest close of the year after falling from nearly 80% from its June peak. The Dec. 31 close of $14.87 was also well below its March IPO price of $18, with no end to the misery in sight.
What a difference a month can make.
There’s one more hurdle to clear if the rebound effort is going to solidify. And, that test is coming soon. This week in fact. If iQiyi stock can get up and over that hump though, this undervalued name could undergo a major recovery move.
What’s iQiyi? It’s often compared to Netflix (NASDAQ:NFLX), and has even been called the Netflix of China. It’s not an entirely unfair comparison. It also has a lot of similarities to Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) property YouTube, however, in that user-generated content is a key part of its video mix. If anything it’s actually a hybrid of the two platforms that are so popular in the western hemisphere.
More important though, iQiyi is a hit among Chinese consumers, many of whom are still relatively new to the trappings of high-speed connectivity and the massive amount of entertainment available on demand.
The numbers validate the claim.
During the third quarter of 2018 (its most recently-reported quarter ) QI revenue grew 48% year-over-year to $1.0 billion. Its user base expanded from 42.7 million a year earlier to 80.7 million.
It’s still losing money, but so did Netflix in its early years. YouTube was in the red as well when Google acquired it back in 2006. Revenue growth is the priority right now, and iQiyi is beefing that figure up in a big way.
Turnaround for IQ Stock
That wasn’t enough to impress investors for the better part of last year.
IQ stock certainly saw the usual post-IPO euphoria, running from its initial public offering price of $18 to a high of more than $46 by June. Once the buzz wore off, iQiyi stock plunged, falling all the way back to less than $15 by late-December.
The reasons for the selloff may have extended beyond post-IPO psychology. Most Chinese stocks fell out of favor with western investors in 2018, driven by fear that newly-introduced tariffs would stifle China’s economic growth. Not even a low-cost digital video service was inherently immune to a sweeping slowdown.
The market is seeing matters in a much different light now, however, forcing some key technical progress from IQ stock.
The daily chart tells the tale. Shares were guided lower by a falling resistance line for the last half of 2018, but that technical ceiling was finally broken in January. The buyers haven’t looked back. In fact, a streak of higher lows has been well developed.
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The job’s not quite done yet. The 100-day moving average line, plotted in gray, lies dead ahead at $21.12. iQiyi stock is approaching that potential ceiling after a pretty good move that may have exhausted the bulls, even if only temporarily. Unless and until IQ stock moves above the 100-day line, it’s difficult to dive all the way into. Be prepared for a pause.
If IQ stock can get going again after that pause though, and push above the 100-day average, would-by buyers waiting for better days could crawl out of the woodwork.
The company’s certainly got enough growth in store to keep traders in a buying mood. This year’s top line should be up more than 30%, further whittling down the losses iQiyi has been booking.
Looking Ahead for IQ Stock
And that’s the stumbling block for a large swath of interested but wary investors: Just how sustainable is this company’s growth?
Probably as much as analysts currently believe, give or take.
Prior to last year, iQiyi had done most things by itself, for itself. Now that it’s proven to be a marketable on-demand video platform though, alliances and partnerships that bolster growth are taking shape in a big way.
The company just announced its high definition video service Qisubo would be available in select Thailand hotels. A couple of weeks back, iQiyi and online travel-booking service Ctrip (NASDAQ:CTRP) unveiled a package deal that drives each organization’s customers to the other.
Although the potential of its market size is finite, iQiyi is out on front, and being positioned as the go-to partner in China’s nascent on-demand video industry will make it the growth leader, much like Netflix was in its early days on the other side of the world.
As of the latest look, analysts hold a consensus target price of $25.58 on IQ stock. That’s a target that not only says shares are undervalued by about 20%, but a target that will likely move higher the more iQiyi stock gains.
Clearing the 100-day moving average line is the first step though.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.