Chinese Streaming Service iQiyi Reaps In $2.3 Billion During IPO

About: iQIYI, Inc (IQ), Includes: BIDU, TCEHY
by: Euan Jones

iQiyi’s market debut brought in $2.3 billion for the company, but shares quickly plunged in ensuing trading.

The company is facing tough competition from the likes of Netflix and Tencent Video.

iQiyi has a serious history of net losses and needs to produce even more unique content if it hopes to one day become profitable.

Western streaming services like Netflix (NASDAQ:NFLX) have a new competitor to worry about; iQiyi (NASDAQ:IQ), the Baidu (NASDAQ:BIDU)-owned Chinese streaming service, recently debuted on the NASDAQ to the tune of some $2.3 billion dollars, pricing its shares at $18 a piece during its debut. Not everyone was sold on iQiyi’s promise, however; the company’s shares plunged in trading after its debut, briefly lingering around the $15.55 mark, and iQiyi’s recent history of losses have caused some investors to lose their appetites when considering the company’s future.

Net losses are piling up

The good news for fans of iQiyi is that revenue jumped by nearly 55 percent last year alone; the bad news is that the company is still posting sizable net losses, and has yet to turn a profit since its 2010 launch. The company’s mammoth $592 million net losses last year from cloud mining, according to financial filings made with the SEC, will likely serve as an albatross around its neck in the market for the foreseeable future, too.

Still, not everything is bleak for iQiyi; the growth of the Chinese entertainment industry has been astonishing in recent years, for instance, leading to an infatuation with Chinese streaming services in Western media sources. The domestic online video market in China is expected to grow from $3.5 billion in 2015 to $15.2 billion in 2020, representing a huge opportunity for investors. Companies like iQiyi, not to mention others like Tencent (OTCPK:TCEHY) video, which it’s competing with, have been drawing serious attention from investors precisely because they stand on the precipice of what could be a streaming-boom in the near-future. As millions of Chinese citizens become wealthier and demand Netflix-like services for themselves, companies like iQiyi could stand to leverage that growing demand into huge sums of revenue, provided they play their cards right.

In order to do that, however, iQiyi will need to make proper use of its existing financial assets to ensure a profitable future; the company had previously raised almost $2 billion in private funding before its debut, and the $2.3 billion in brought home from its IPO will surely prove useful towards optimizing its existing streaming services, too. Still, money alone isn’t enough; to compete against the likes of Netflix and Tencent, the Baidu-owned iQiyi will need to start shoveling out content on a large scale, in order to sate the growing appetites of streamers who frequently demand new movies and shows to watch.

iQiyi’s future trading could be weighed down by a dampened tech market, too; tech shares plummeted recently, largely thanks to PR fiascos facing Facebook and presidential tweets that sent Amazon’s (NASDAQ:AMZN) valuation tumbling, and sense of despair settling over the tech industry, in general, will prove quite harmful to fresh-faced companies like iQiyi who are just foraying into the market for the first time. If iQiyi is to have a long, thriving future in the marketplace, it needs to start doing more to boost its user base, which now revolves around the 50 million subscribers it retains in China.

Baidu remains in control

Another thing for investors to consider before throwing their money at iQiyi is that Baidu, the parent corporation of iQiyi, will retain a majority control over the company. Some investors don’t necessarily see this as a bad thing, however; after all, to successfully compete against established streaming giants like Netflix and Tencent, iQiyi will need some expansive IT infrastructure to rely on, and Baidu could provide some seriously heavy computational power for the aspiring streaming service.

If iQiyi really hopes to remain relevant for long, it will likely continue to channel huge sums of money into the production of original content to feed to its Chinese and foreign subscribers. On that front, investors have little to worry about; as the company’s prospectus claims, its own creative content accounted for 5 of the top 10 original internet variety shows, and streamers are clearly happy with much of what they’re getting from iQiyi currently. The company has also previously struck up a deal with Netflix, meaning Chinese subscribers can access many of the West’s most popular TV shows through its services, too.

For iQiyi, future content deals with other Western companies could prove crucial towards the expansion of its user base. For it to have any long-term viability, however, its executives will need to address its sizable net losses, which were over half a billion last year alone. Don’t count iQiyi out just yet because it shares are trading downwards after its debut; with an impressive market valuation that some assert is more than $12 billion, and with the backing of Baidu, iQiyi could yet make itself a globally recognized streaming brand that draws in viewers from around the world.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.