IQ Stock Is a Good, If Underestimated, All-Weather Holding

The premise of iQiyi (NASDAQ:) was lauded in the middle of last year, shortly before and then after the company went public. Though IQ stock stumbled immediately out of the gate, last year’s rally from a low near $16 to a peak of above $46 sent a clear message. That is, the so-called Netflix (NASDAQ:) of China was positioned to sustain its incredible pre-IPO growth pace.

IQiyi Stock Is a Play on China's Millennial Craze (IQ)

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Everything that could have gone wrong for iQiyi stock did go wrong in the meantime. Shares are presently priced at less than $14 and are lingering fewer than four points from record lows seen at the end of last year.

Yes, the impact of newly-imposed tariffs and the ensuing economic headwind played a major part in that pullback.

Take a closer look though. While the economic backdrop has remained uncertain and best and concerning at worst, iQiyi is surviving. In fact, it’s thriving. The biggest challenge facing IQ stock is inspiring investors to take notice.

A Closer Look at iQiyi

It’s often called the Netflix of China, although that’s not the best comparison. It’s actually more akin to Alphabet (NASDAQ:, NASDAQ:GOOGL) property YouTube, in that it allows users to upload their own video content in addition to the digital content curated by iQiyi. The comparison is particularly more appropriate now that YouTube offers subscription-based access to traditional cable programming and originals.

Regardless of the most relevant comparison though, two facets about the company have remained largely overlooked during the past few turbulent months. One of them is, there’s nothing else in China quite like it. The other is, Chinese consumers increasingly love their iQiyi service.

Numbers tell the tale, for investors that care about such details.

Take last quarter’s headcount for example. As of the end of its second fiscal quarter, the company boasted a , a figure that was up 50% year-over-year. To that end, revenue improved 15% year-over-year, reaching $1.0 billion.

It’s still bleeding money, which perhaps is the biggest mental hurdle for would-be IQ stock owners. Losses continue to swell too, reaching $339.0 million in the second quarter. Selling and administrative expenses and R&D spending made up a huge amount of its spending growth that led to widening losses.

If the pros are right though, this young company is already at the profit turning point. From here, spending should stabilize, but revenue should continue to grow.

The Near Future and IQ Stock

That’s a tremendously big “if,” of course. iQiyi is still a startup, and doesn’t enjoy the deep pockets rival players like Youku-Tudou and Tencent Video have. Tencent Video is a project owned and operated by Tencent (OTCMKTS:), while Youku is a subsidiary of eCommerce giant Alibaba (NYSE:).

By many measures, however, iQiyi may be better served by operating independently of China’s more established digital technology companies.

Not unlike Netflix in its infancy, iQiyi doesn’t have any other companies standing over its shoulder and scrutinizing every decision it makes. That allows it to lay the proper foundation first, setting the stage for the same kind of market dominance Netflix enjoys in the western hemisphere now. Profits aren’t quite the point just yet.

IQ stock is also China’s only real pure play on the streaming video market, which is something focused investors like.

The Bottom Line on IQ Stock

The projected fiscal trajectory hasn’t changed much since iQiyi’s IPO. The only thing that’s changed is the market’s perception of IQ stock, and even then, the change has been modest. The bulk of the suppressive effort holding iQiyi stock is fear of how investors will view it should China slip into a recession.

Even so, it appears investors are slowly but surely warming up to the reality that such a headwind doesn’t necessarily have to be damning for iQiyi’s growth. In the same vein that low-cost entertainment like that provided by Netflix is seen as even more valuable when times are tough, iQiyi’s service is an affordable alternative to pricier entertainment options there.

On the flip side, should the trade summit between President Trump and China’s President Xi Jinping lead to a long overdue breakthrough, the subsequent economic recovery could make iQiyi an easily affordable tack-on for its consumers.

There’s just not a lot of downside with IQ stock, relative to its upside.

The trick will continue to be getting others to embrace the idea that entertainment subscriptions are the new norm in China, just like they are elsewhere.

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

The post appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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