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Perception, More Than Anything Else, Is Holding Back IQ Stock

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In retrospect, the early buyers of iQiyi (NASDAQ:IQ) following its IPO in March of last year are likely regretting their decision. After soaring to a high of $46.23 by June of 2018, IQ stock has since fallen back to a price near $18. That’s roughly where it IPO’d, though it traded as low as $14.35 in December.

Don’t come to a misguided conclusion though. iQiyi, often referred to as the Netflix (NASDAQ:NFLX) of China, hasn’t done anything wrong. In fact, it’s done everything right, and everything it was expected to do a year and a half ago. The market simply doesn’t care because circumstances changed in the meantime.

Still, unless those circumstances change for the better again, iQiyi’s results won’t quite matter.

The good news for current and prospective IQ stock owners is, change appears to be on the horizon, one way or another.

China’s Consumers Still Healthy

Though it’s called the Netflix of China, that’s not an ideal comparison. In that it also offers a variety of free, ad-sponsored video content including user-generated content, iQiyi is also similar to Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) property YouTube.

It’s mattered little. Regardless of its revenue mix, iQiyi has been infected by the same economy-minded panic that’s banged up other Chinese consumer names like Alibaba Group Holding (NYSE:BABA), Tencent Holdings (OTCMKTS:TCEHY) and Baidu (NASDAQ:BIDU).

Those underlying doubts haven’t been entirely unmerited. For the second quarter of the year, China’s inflation-adjusted economic growth pace fell to a 27-year-low of 6.2%.

The politically-charged headlines on the matter, however, paint a somewhat misleading picture.

Chief among the messages delivered without the proper context is that, on a relative basis, China’s economy has been growing at its “slowest pace in X years” for some time now. Last year’s GDP growth of 6.6% was its weakest growth rate since 1990.

In 2015, the country’s GDP growth rate of 6.9% was the slowest in 25 years. The issue isn’t so much a headwind as it is an ever-improving comparison.

The other key data nugget lost in the noise: Consumer spending in China this year has remained shockingly strong. Retail sales were up 8.4% for the first half of the year and grew 9.8% year-over-year in June alone.

Private sector jobs and home-grown consumerism are both now bigger components than government jobs and export-related employment, and it’s working for the country.

That’s the trend, market and demographic iQiyi is plugging into.

iQiyi Results Trajectory

It would be naive to believe a prolonged slowdown in China’s industrial complex and export business wouldn’t eventually drive an adverse impact on the country’s consumerism. It would take a much more robust headwind than the current one, however, to take a meaningful bite out of China’s nascent but potent services industries.

Translation: Most of the people in China that have recently fallen in love with mobile tech and high-speed internet connections aren’t ready to forego their online videos just yet.

The numbers confirm it. Though its second-quarter figures have yet to be released, for the first quarter of the year, iQiyi’s subscriber growth soared 58% year-over-year, from 61.3 million to 96.8 million.

The company’s losses grew too, from a manageable $59.1 million in the first quarter of 2018 to a loss of $268 million in Q1 of this year. It’s a spending spree not unlike one Netflix went on when it was seeking self-sufficiency though, and with revenue up 47% during the first quarter for iQiyi, it almost seems worth it.

And, analysts that handicap IQ stock think it will be eventually worth it.

The revenue trajectory is undeniably impressive, and few doubt the analysts’ near-term outlook. What’s largely being overlooked is the analyst community’s expectations that revenue growth will continue to grow while relative spending growth on content slows. Though still expected to be in the red, the pros are looking for losses to shrink this year and next, dramatically improving the per-share profit figures for iQiyi stock.

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Net profits are still only on the distant horizon, but investors reward direction as well.

Bottom Line for IQ Stock

It’s certainly not a guarantee; they don’t exist when it comes to stocks. They particularly don’t exist for stocks of companies subject to so many external forces like economic cycles and political matters that impose growth-slowing tariffs.

There’s going to come a time sooner or later, however, when the market has to appreciate that like Netflix, iQiyi is rather recession-resistant. Most people in any developed part of the world can scrape together a few bucks per month for a universe of entertainment. It’s bigger threat is competition from the likes of Tencent and Baidu’s Youku.

Unlike Netflix though, iQiyi has already faced its chief competition and held its own.

The great irony here is that headlines may need to worsen before iQiyi stock rebounds.

Experts believe China’s GDP growth pace will have to slide to 6.0% or lower before President Xi Jinping will finally start to negotiate more inviting tariff rates. If and when that happens, it will ease the pessimism that’s been weighing on IQ stock, even if it actually means little for China’s consumers. China’s consumers are doing well enough as is.

Whatever the case, iQiyi is doing everything it’s supposed to be doing. The market just doesn’t care to notice… yet.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about him at his website jamesbrumley.com, or follow him on Twitter, at @jbrumley.



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