Seeking Alpha

iQIYI: Tencent Is Coming... Should You Be Afraid? (ALT Perspective)

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About: iQIYI, Inc. (IQ), Includes: BABA, BIDU, TCEHY
by: Brian Bain
Brian Bain
Contrarian, value, Deep Value, Growth
Summary

CEO is steering the company more toward Disney than Netflix as inspiration (in terms of content and merchandising strategies).

Reasons IQ is worthy of investment.

Reasons for caution regarding IQ.

Tencent is being aggressive in growing market share.

Alibaba (BABA) and Tencent (TCEHY) have huge treasure chests to attempt to take market share from IQ.

The story behind the interview:

ALT Perspective has written several pieces on iQIYI (IQ) recently and I caught up with him to learn more about the "Netflix of China."

For those who prefer to read, my full interview notes are copied below.

Link to ALT Perspective's original article:

iQIYI: The Need For Caution Has Intensified

Interview notes:

  • IQ is a market leading online entertainment service, in many ways similar to Netflix. Commonly referred to as the "Chinese Netflix"

  • It is creating content that has gone on to be quite popular. The company is also very interested in partnering and licensing.

  • CEO is steering the company more toward Disney than Netflix as inspiration (in terms of content and merchandising strategies)

  • Ex: Angry Birds began as a video game and went on to movies and merchandising

  • IQ is aiming for greater vertical integration

  • Reasons IQ is worthy of investment

    • The company and trend has a lot of momentum

    • The IQ story is just getting started

    • It's like investing in the early days of Netflix

  • Reasons for caution regarding IQ

    • The company is based in China (may not be fully transparent). As a result, there could be issues we are not aware of yet.

  • What about the fundamentals?

    • Doesn't look nice; P/E and P/S are both high

    • Creating content is expensive

  • An investment like this is not meant to be a core part of a portfolio

  • Tencent (OTCPK:TCEHY) is being aggressive in growing market share

  • Paid subscribers are increasing significantly. People can still watch content for free but see ads.

  • As the middle class in China grows, people will want to pay for ad-free subscriptions.

  • Alibaba (BABA) and Tencent have huge treasure chests to attempt to take market share from IQ

  • Tencent is on par with IQ in terms of mobile MAU

  • Time spent on long-form video going down

  • Short form video consumption is going up on mobile

  • Consumer time spent on video is encroaching on time spent on social media

  • Will people spend less time on WeeChat be a threat to Tencent?

  • China's "FANG" is "BAT" - Baidu (BIDU), Alibaba, Tencent

    • Baidu is the "Google" of China and a backer of IQ

  • The Tencent is like the Amazon threat

    • Should not dismiss completely, but can be overstated

  • Investors expecting IQ doubling or tripling in a year are mistaken

  • Investors must be prepared for short seller reports, etc. How will you respond to the negative news? Will you hold, sell, and/or regret?

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Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. Brian and Investor in the Family make no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Brian and Investor in the Family will be met.

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.