Chinese search giant Baidu, Inc. (NASDAQ:BIDU) has long been referred to as the "Google of China." The company also boasts iQiyi, the largest streaming service in the Middle Kingdom, which also earned a comparison moniker as the "Netflix (NASDAQ:NFLX) of China."
Followers of Baidu have long expected that its online streaming segment would eventually be listed on the U.S. stock market, as there have long been rumors of a pending initial public offering. Baidu finally confirmed this in its 2017 fourth-quarter financial release, reporting that iQiyi had filed a draft registration statement with the U.S. Securities and Exchange Commission seeking an IPO. The official filing was posted on Feb. 27, providing potential investors with a wealth of information.
The newly minted company would have its American depositary receipts listed on the Nasdaq Stock Market under the symbol "IQ." The company says it plans to raise a minimum of $1.5 billion, though the first number specified is typically a placeholder in the initial filing.
Here are some of the key metrics investors should review if they are considering an investment in iQiyi's long-awaited spinoff.
Raw financial numbers
According to its filing with the SEC, iQiyi posted revenue of $2.67 billion in 2017, an increase of 55% year over year. The streaming segment generated a net loss of $574 million, which increased 22% from the prior year.
iQiyi has a business model that generates revenue from subscriptions, advertising on its platform, and content distribution. In this way, it more closely resembles Hulu than Netflix.
The company generated revenue from membership services (subscriptions) that grew to $1.0 billion, up 73.7% year over year, while online advertising sales hit $1.25 billion, up 44% over 2016.
Small amounts of additional revenue are generated by a variety of activities, such as relicensing certain content, broadcasting live programming, providing online games, and licensing iQiyi's intellectual property. Content distribution revenue grew 138% year over year to $183 million, while other revenue grew to $229 million, up 13% over the prior year.
Cost of revenue grew to $2.67 billion, up 52% over 2016, driven by increases in the cost of programming and bandwidth. Content costs of $1.94 billion increased 67.3% over 2016, as the company ramped up its programming to establish a firm foothold in the nascent market. Bandwidth cost grew to $336 million, up 16.8% over the prior year.
iQiyi noted that over the short term, its cost of revenue would continue to outpace revenue growth, as it invested in content and worked to improve its streaming technology. The company expects that rapid subscriber growth and economies of scale will, over the longer term, result in escalating revenue.
Baidu revealed a number of important metrics that give insight into iQiyi's popularity. The company had 50.8 million paying subscribers, an increase of 68.4% over the prior year. This is slightly behind Netflix's 54.75 million domestic subscribers. China has an estimated 241 million fixed-broadband subscribers, representing a fertile market for future growth.
The company provided details on its user base, revealing 126 million daily active users (DAUs) on mobile devices and 53.7 million on personal computers. The monthly numbers were even more impressive, with 421.3 million monthly active users (MAUs) on mobile devices and 424.1 million MAUs who accessed the service from a PC. In December 2017, users watched a total of 9.2 billion hours of video on the platform, and each spent an average of 1.7 hours per day streaming.
The company's investment in content appears to be paying off. In 2017, iQiyi's original programming accounted for five of the top 10 original internet variety shows, and six of the top 10 original internet drama series in China. Its first high-budget original series, The Lost Tomb, generated more than 100 million video views in the first 24 hours and over 4 billion total views.
iQiyi appears to be playing to Baidu's strength in artificial intelligence (AI) and taking a page from the Netflix playbook, as it uses the technology to inform its programming decisions. In the filing, it says: "We distinguish ourselves in the online entertainment industry by our leading technology platform powered by advanced AI, big data analytics and other core proprietary technologies. Our core proprietary technologies are critical to producing content that caters to user tastes, delivering superior entertainment experience to our users."
Will this be a binge-worthy investment?
Netflix has long been a battleground stock, with bulls cheering the company's continuing large-scale investment in content and rapid subscriber growth, while bears decry the increasing debt load and cash burn as a sign of impending doom.
Additionally, investments in Chinese companies tend to have a slightly higher risk profile, due to the potential for government intervention and uncertainties involving variable interest entities (VIEs), a common legal structure among companies from China. Baidu and iQiyi are both organized as VIEs.
It is important to remember that after an IPO, shares of newly minted companies can be extremely volatile for some time to come. That is even more likely in this case, since the company has yet to produce a profit. That said, investors looking to increase their exposure to the fast-growing streaming market in China could do worse than a spinoff from Baidu, which has a long track record among Chinese investments.