iQIYI: A Strong Buy On Multiple Positive Catalysts

Summary

• iQIYI, the embattled video-streaming platform in China, has several catalysts driving its share price higher.
• China's early recovery from COVID-19 is enabling iQIYI to roll ahead with content production and business growth.
• The purported intention of Tencent Holdings to acquire Baidu's majority stake in iQIYI could be gaining momentum due to its own four drivers.
• If the allegations made against iQIYI are proven unfounded, whether by the SEC and/or the independent agency engaged, there could be a powerful relief rally.
• From the technical chart of iQIYI, the stock could be on the verge of a breakout from a two-and-a-half month old downsloping trading channel.

Brief investment thesis

iQIYI (NASDAQ:IQ), often dubbed the Netflix (NFLX) of China, has four catalysts driving its share price higher.

1. The release of its 2020-2021 slate of original films at a major industry event last week is a reminder that China has largely put COVID-19 behind. Furthermore, the films involved scriptwriters, directors, and casts who are widely acclaimed, leading to expectations of a good box office showing. The adaption of one of its reality shows into a movie format also served to highlight the monetization opportunities of its intellectual property strength.
2. The purported intention of Tencent Holdings (OTCPK:TCEHY) (OTCPK:TCTZF) to acquire Baidu's (BIDU) 56.2 percent stake in iQIYI could be gaining momentum due to its own four drivers.
   • The stiff competition leading to high content acquisition costs provides the impetus for the stakeholders to seek a merger of the video units.
   • Furthermore, the negative sentiment arising from a short-seller report and the resulting investigation by the U.S. Securities and Exchange Commission ('SEC'), coupled with the general aversion towards Chinese companies makes it difficult for iQIYI to raise capital from the market anyway. Privatization could be better off.
   • Baidu might be happy to lock in its profits from iQIYI and it could then be free to pursue its video ambitions.
   • iQIYI would be able to benefit from a strong parent and achieve its vision of becoming an entertainment powerhouse in the likes of Disney (DIS).
3. If the allegations made against iQIYI are proven unfounded, whether by the SEC and/or the independent agency engaged, there could be a powerful relief rally.
4. From the technical chart of iQIYI, the stock could be on the verge of a breakout from a two-and-a-half month old downsloping trading channel.

A strong slate of original films for 2020-2021 bodes well for user engagement and revenue

Early

Analyst’s Disclosure:I am/we are long BIDU, BABA, NTES, TCEHY, TCOM. 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.

I may initiate a long position in IQ over the next 72 hours.