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iQIYI: The Thesis Is Still Intact

Aug. 03, 2018 3:57 PM ETiQIYI, Inc. (IQ)JD, TCEHY76 Comments
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  • IQ reported very good earnings on Tuesday.
  • The stock price was muted in the aftermath but has recently pulled back more than 10%.
  • However, there are some under-appreciated developments that the company is executing on.

Investment Thesis

The “Netflix (NFLX) of China,” iQIYI (NASDAQ:IQ), exceeded expectations in Tuesday's earnings report, and it is still a candidate for market-beating returns. The headline numbers were solid, but there were also some aspects of the call that didn’t get enough attention.

What Happened

The company’s second quarter results were solid. Revenues grew 51% in local currency to $933 million. Membership services sales exploded 66% to $374 million. And advertising revenues grew 45% to $396 million.

One of the more noteworthy items in the quarter was the net additions for subscribers. The company added 5.8 million members for a total of 67.1 million. To put this in context, Netflix added just 5.15 million in its last reported quarter. Naturally, Netflix’s subscriber growth should be slower as it has saturated its core market (the U.S.) but there is still considerable room internationally that it is pursuing.

IQ attributes some of the subscriber growth to its partnership with JD.com (JD). What is interesting is that Tencent (OTCPK:TCEHY) owns a sizable chunk of JD, over 15% in fact. This is notable because Tencent Video is the top competitor with IQ. It makes you wonder if JD’s partnership with IQ reveals it believes more in IQ than Tencent Video, even though Tencent is a huge investor.

Moreover, it will be interesting to see how many subscribers Tencent Video adds. In its latest quarter, that number was almost 63 million, so it will be a good gauge for IQ’s market share.

What It All Means

Another point on the subscriber piece is that the company is not trying to squeeze every last dollar of profit. Check out this quote from the CFO,

“as I've said before, so now ARPU [average revenue per user] is not the primary goal of membership surveys. Because we see the trend - definitely will see

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Analyst’s Disclosure: I am/we are long IQ. 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.

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