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So Soon After Its IPO, Is iQiyi a Buy?

On this episode of Industry Focus: Tech, host Dylan Lewis is joined by Fool.com contributor Danny Vena to discuss how iQiyi’s(NASDAQ:IQ) connection to Baidu(NASDAQ:BIDU) may give investors an advantage compared to a traditional start-up.

A full transcript follows the video.

This video was recorded on May 11, 2018.

Dylan Lewis: I have gone on the record in the past in talking about how I do not like buying into recent IPOs. I think, even in the Never Will I Ever week, I said that I’d never buy shares of anything that hadn’t been trading for at least six months, just because I like seeing that extended period of results and a longer track record, let some of the hype die down a little bit.

I think this might be one that I asterisk, Danny. [laughs] I did say never will I ever, but I think there’s a lot of really interesting stuff going on here, and I think there are some things that make this somewhat outside of the standard IPO for me. This is something that has been spun out of a large and successful business. If you’re a Peter Lynch follower at all and you enjoy his investing philosophy, he loves the idea of a company being spun out, because you allow that company to have their growth and their value realized in a way that maybe it wouldn’t be when it’s umbrella-ed under a larger business. I also look at that IPO slightly differently than I would a standard one because it’s not as much of a cash-out for early investors. You look at Baidu, and they’re still maintaining a very large stake in this company, and they’re maintaining the controlling interest in this company.

Danny Vena: Right. Baidu is still the majority shareholder. I looked at some numbers yesterday, and if memory serves, they’re still somewhere around a 60% owner of iQiyi, and they’re also still mentoring them, they’re still providing them with the artificial intelligence that they need to decide what their subscribers want to watch. There’s a lot to be said about a smaller company having a really large, successful business — I mean, there’s really not many businesses in China that are more successful than Baidu — but, having that company as a mentor, as a guide, supporting them, providing them data, I think that’s a lot different than a company that’s just a start-up that’s gone out to an IPO.

Lewis: Yeah. They get particularly attractive to me, too, because as it stands, they’re roughly a $14-15 billion business. You look at Netflix(NASDAQ:NFLX) as a $150 billion business, and it’s easy to extrapolate that out. You have to do some puts and takes there, because this is a company that only operates in China, whereas Netflix is in 190 countries at this point. I think it just demonstrates that there’s a lot of growth in this space. And, as someone that’s kind of a pure-play, it’s a super interesting company, certainly one that’s on my short-term watch list. A couple of the other names that we talked about today, Tencent in particular is another company that I’m watching. But, the streaming video space in China just seems so poised for growth right now.

Vena: It’s crazy. I think the consumers in China are a few years behind us in terms of, Netflix started their streaming video back in 2007. iQiyi started their business in about 2010. And the modeling of Netflix only started in mid-2015. So, they’re several years behind, I think there’s still a lot of growth there.

The runway is pretty incredible. It’s never going to reach the scale of a Netflix. China has about 1.3 billion people, compared to the seven billion in the world that Netflix has as potential customers. Obviously, there are going to be some places where you’re not going to have the availability of fixed broadband, where data rates on cellphones are not going to be conducive to streaming video. But, when you take those out, you take out the consumers that really couldn’t afford a service like that, the poverty-level consumers, you still have a really huge runway.

I’ve read some estimates that said that potential for the streaming market in China right now is somewhere in the neighborhood of 600 to 700 million. And, it’s climbing, as you have a growing middle class in China, you have more urban millennials who are tech-savvy and who are making enough money to afford these services. So, I think the runway is pretty large.

Lewis: That’s all to say, there are a lot of megatrends that are pushing this company. It’s something that I’m probably going to look to opportunistically start a small position in and maybe add to over the next couple of months. Danny, is this something that you’re interested in as a stock to own?

Vena: It’s a company that … again, my inclination at first is to not go at a fresh IPO, having been burned in the past. But looking at this company, there are a lot of outlying factors. There are a lot of asterisks, as you put it. I was actually looking to make an investment in this company in the last week or two. I think that’s firmed up in my mind a little bit. I’ll probably be doing the same thing as you some time in the coming weeks or months, I’ll be looking to establish a position.

Lewis: Credit where credit is due on this-like I said, Matt Argersinger put this company on our radar, so thanks to him for tipping us off. And thanks to you, Danny, for hopping on the show and talking about it with me.

So Soon After Its IPO, Is iQiyi a Buy?

On this episode of Industry Focus: Tech, host Dylan Lewis is joined by Fool.com contributor Danny Vena to discuss how iQiyi’s(NASDAQ:IQ) connection to Baidu(NASDAQ:BIDU) may give investors an advantage compared to a traditional start-up.

A full transcript follows the video.

This video was recorded on May 11, 2018.

Dylan Lewis: I have gone on the record in the past in talking about how I do not like buying into recent IPOs. I think, even in the Never Will I Ever week, I said that I’d never buy shares of anything that hadn’t been trading for at least six months, just because I like seeing that extended period of results and a longer track record, let some of the hype die down a little bit.

I think this might be one that I asterisk, Danny. [laughs] I did say never will I ever, but I think there’s a lot of really interesting stuff going on here, and I think there are some things that make this somewhat outside of the standard IPO for me. This is something that has been spun out of a large and successful business. If you’re a Peter Lynch follower at all and you enjoy his investing philosophy, he loves the idea of a company being spun out, because you allow that company to have their growth and their value realized in a way that maybe it wouldn’t be when it’s umbrella-ed under a larger business. I also look at that IPO slightly differently than I would a standard one because it’s not as much of a cash-out for early investors. You look at Baidu, and they’re still maintaining a very large stake in this company, and they’re maintaining the controlling interest in this company.

Danny Vena: Right. Baidu is still the majority shareholder. I looked at some numbers yesterday, and if memory serves, they’re still somewhere around a 60% owner of iQiyi, and they’re also still mentoring them, they’re still providing them with the artificial intelligence that they need to decide what their subscribers want to watch. There’s a lot to be said about a smaller company having a really large, successful business — I mean, there’s really not many businesses in China that are more successful than Baidu — but, having that company as a mentor, as a guide, supporting them, providing them data, I think that’s a lot different than a company that’s just a start-up that’s gone out to an IPO.

Lewis: Yeah. They get particularly attractive to me, too, because as it stands, they’re roughly a $14-15 billion business. You look at Netflix(NASDAQ:NFLX) as a $150 billion business, and it’s easy to extrapolate that out. You have to do some puts and takes there, because this is a company that only operates in China, whereas Netflix is in 190 countries at this point. I think it just demonstrates that there’s a lot of growth in this space. And, as someone that’s kind of a pure-play, it’s a super interesting company, certainly one that’s on my short-term watch list. A couple of the other names that we talked about today, Tencent in particular is another company that I’m watching. But, the streaming video space in China just seems so poised for growth right now.

Vena: It’s crazy. I think the consumers in China are a few years behind us in terms of, Netflix started their streaming video back in 2007. iQiyi started their business in about 2010. And the modeling of Netflix only started in mid-2015. So, they’re several years behind, I think there’s still a lot of growth there.

The runway is pretty incredible. It’s never going to reach the scale of a Netflix. China has about 1.3 billion people, compared to the seven billion in the world that Netflix has as potential customers. Obviously, there are going to be some places where you’re not going to have the availability of fixed broadband, where data rates on cellphones are not going to be conducive to streaming video. But, when you take those out, you take out the consumers that really couldn’t afford a service like that, the poverty-level consumers, you still have a really huge runway.

I’ve read some estimates that said that potential for the streaming market in China right now is somewhere in the neighborhood of 600 to 700 million. And, it’s climbing, as you have a growing middle class in China, you have more urban millennials who are tech-savvy and who are making enough money to afford these services. So, I think the runway is pretty large.

Lewis: That’s all to say, there are a lot of megatrends that are pushing this company. It’s something that I’m probably going to look to opportunistically start a small position in and maybe add to over the next couple of months. Danny, is this something that you’re interested in as a stock to own?

Vena: It’s a company that … again, my inclination at first is to not go at a fresh IPO, having been burned in the past. But looking at this company, there are a lot of outlying factors. There are a lot of asterisks, as you put it. I was actually looking to make an investment in this company in the last week or two. I think that’s firmed up in my mind a little bit. I’ll probably be doing the same thing as you some time in the coming weeks or months, I’ll be looking to establish a position.

Lewis: Credit where credit is due on this-like I said, Matt Argersinger put this company on our radar, so thanks to him for tipping us off. And thanks to you, Danny, for hopping on the show and talking about it with me.

Can iQiyi Stock Keep Going After Last Week's 27% Pop?

iQiyi (NASDAQ:IQ)is no longer a broken IPO. China’s leading streaming video service in terms of monthly active users and overall time spent on the platform moved 26.9% higher last week, surging after offering up encouraging signs that its recently announced partnership withonline retail giant JD.com (NASDAQ:JD)is already paying off. iQiyi also landed a potentially significant certification from China’s leading digital rights organization. An analyst initiating coverage with a bullish rating is the cherry on top.

Last week’s big gain is a narrative-changing move. iQiyi started off the week below last month’sIPO price of $18. It’s now trading comfortably above its debutante price.

iQiyi app in action.

Image source: iQiyi.

Streaming along

It’s been just two weeks since iQiyi and JD.com announced a cross-promotional partnership where anyone signing up for an annual subscription to either platform’s premium service would receive access to the other offering’s perks. iQiyi and JD.com revealed last week that a million people have already signed up for the combined plan for iQiyi VIP or JD Plus.

A million iQiyi VIP accounts may not seem like a lot, but last week’s announcement also said that there are now more than 61 million iQiyi premium subscriptions. There were just 50.8 million paying subscribers at iQiyi at the end of 2017, so growth this year has been phenomenal.

The rally kept going a day after the JD.com partnership update as iQiyi announced that it was the first Chinese video platform to have its digital rights management system approved by the Hollywood-recognized ChinaDRM Lab. Certification may not be the same kind of needle mover as its success nabbing premium users, but it will make it that much easier for iQiyi to secure marquee content in the future.

The double dose of good news came after Goldman analyst Piyush Mubayi initiated coverage of the stock with a buy rating and a $23 price target. With iQiyi’s stellar growth in its first quarter as a public company — up 57% for the period after surging 55% for all of 2017 — the dot-com speedster is living up to the hype.

The vast majority of iQiyi’s more than 420 million monthly active users may be ad-supported freeloaders, but iQiyi’s biggest growth is coming from premium users. Membership services revenue outpaced ad revenue in the first quarter — up 67% versus 52% — and should become the top revenue category in the current quarter. iQiyi is still running at a steep operating loss, but that isn’t a deal breaker at this point in its growth cycle.

We may not have seen the end of iQiyi’s days as a broken IPO. The stock is volatile, and the next market downdraft can send the shares below $18 again. However, a flurry of good news will make it that much easier to bounce back if it should buckle under again.