While U.S. tech stocks have roared back to new all-time highs, their tech counterparts in China are still lagging heavily behind, thanks to poor economic and geopolitical sentiment. This creates tremendous buying opportunities in some of China's fastest-growing stocks, especially as prospects for a U.S.-China trade deal brighten. Among my favorite names in this space is iQIYI (NASDAQ:IQ), a company that's frequently dubbed (and most adequately explained) as the "Netflix of China". I'm bullish on iQIYI for many of the same reasons as other investors are: great content platform, incredibly sticky subscriber base, and ambitious expansion plans from both a geographic and category standpoint.
Despite this, investor sentiment on iQIYI has soured, especially after the company's Q1 earnings release, on fears of deceleration. While scale is always a headwind for growth in any company, we shouldn't overreact too harshly - shares of iQIYI have dropped more than 30% since touching a year-to-date high in February; the stock also remains firmly below the mid-$40s at which it was trading early last year.
A quick check on valuation: At present levels, iQIYI trades at a market cap of $13.53 billion. The company also has ¥20.5 billion in cash and ¥8.4 billion of debt on its balance sheet, which, at today's exchange rate of ¥6.88 to the dollar, implies a net cash position of $1.76 billion. This implies an enterprise value of $11.77 billion.
Let's assume that iQIYI manages to notch 20% y/y revenue growth this year - somewhere between the 43% y/y growth it achieved in Q1 and the ~18% revenue growth it's guiding to in Q2. Extrapolating this growth rate from iQIYI's FY18 revenue of ¥25.0 billion gets us an FY19 revenue estimate of ¥30.0 billion, or $4.36 billion. This implies that iQIYI is currently trading at a mere 2.7x EV/FY19
