This story was originally published here.
The coronavirus from China may have the United States in panic mode. But over in China, things have peaked. With more cases outside China than within it, the world’s second-largest economy is entering recovery mode. Acknowledging this, I can’t think of a better entry point for iQiyi (NASDAQ:IQ) stock. Source: NYC Russ / Shutterstock.com
Shares in the “Netflix (NASDAQ:NFLX) of China” have held out well in the past two months. Considering recent volatility in Chinese stocks, that’s a feat unto itself. But it’s near-term and long-term catalysts I’m looking at for iQiyi, not recent performance.
What’s in store for iQiyi near term? The “coronavirus lockdown” catalyst. The outbreak meant millions of Chinese citizens were stuck at home for weeks.
In other words, the company had a captive audience during the crisis. Many Chinese-based names could see big drops in performance for first quarter 2020. But, thanks to this unique catalyst, iQiyi could surprise come earnings time.
Today’s health crisis is a mere blip compared to the company’s long-term trajectory. Consider its potential total addressable market (China has four times the population of the U.S.), and its global expansion efforts. With all these factors at play, IQ stock is a steal at current prices (around $18 per share).
A Growth Story Is in Motion for IQ Stock
As I mentioned above, China is now in recovery mode. It may experience an economic contraction for the first time in decades. But, don’t take that to mean the China story is over. Far from it. And in the case of IQ stock, there’s little that can stop the company’s growth train.
Before the outbreak, the company’s growth was on point. For the fourth quarter of 2019, it posted $1.1 billion in revenue, beating estimates by $90 million. Operating losses of $363.2 million (or 49 cents per share) were above projections of a 62 cent per share quarterly loss.
Unlike Netflix, iQiyi makes money from subscription sales, as well as advertising. Weak ad demand due to the trade war was an issue in 2019. But subscription growth continues to crush it. On the backs of surging subscription growth, the company’s revenue is expected to grow from $4.2 billion in 2019 to $5.7 billion in 2021.
But won’t a coronavirus-driven contraction impact this growth story? I just don’t see how that’s the case. If anything, the recent China lockdown boosted demand for iQiyi’s streaming services. Think about it. You had millions stuck at home, unable to spend money on outside entertainment.
People couldn’t go to the movies. They couldn’t go on vacation. Did they hide that discretionary income under the mattress? Or, more likely, did more Chinese households sign up for streaming subscriptions? I’m going with the latter.
Chances are, this captive audience catalyst means a strong Q1 2020 for iQiyi. The company’s guidance gives estimates of between $1.02 billion and $1.08 billion for Q1 2020 revenue. Yet, given the company’s sales and earnings beats in Q4 2019, I can see the same outcome once Q1 2020 results hit the street.
Don’t Go Against the Megatrends
Investing in IQ stock gives you exposure to two key megatrends — the rise of China’s middle class and the rise of video streaming. The first megatrend remains in play. The company may have reached critical mass among higher-income Chinese households. But, it has tremendous runway in terms of gaining market share in China’s second-tier cities.
As urban household income continues to grow, more will sign up for streaming services like iQiyi. And don’t forget the power of the company’s dual-revenue model. Increased subscriptions helps to grow sticky revenue. But more eyeballs watching the company’s streaming services moves the needle for ad revenue.
iQiyi’s second megatrend factor (rise of streaming) goes beyond its China footprint. The company is making big moves in Southeast Asia. In other words, this isn’t just a “China stock,” but a play on global streaming growth.
Expansion to overseas markets gives the company an edge over its homegrown competition, Youku and Tencent (OTCMKTS:TCEHY). In short, by becoming a global streaming force, iQiyi can diversify its growth strategy.
As it gains momentum in other Asian markets, you can’t say the rest of the world is out of reach. Netflix successfully expanded into a global powerhouse. The same could happen for iQiyi. Compare Brokers
Buy the Dip With iQiyi Stock
It’s no shock Chinese stocks have been the victims of panic selling. But in the case of streaming companies like iQiyi, the selloff makes no sense.
If anything, the coronavirus should be a tailwind, not a headwind, for shares. With millions stuck at home, the company received a tremendous opportunity to capture discretionary income on lockdown.
The markets may be acting irrational, but don’t use that as an excuse to stay on the sidelines. Despite recent fears, iQiyi’s long-term growth story remains intact. As China enters recovery mode, now may be the time to enter IQ stock.
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