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3 Reasons iQiyi Flunked As an IPO

By Rick Munarriz – Apr 2, 2018 at 9:05AM

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Baidu takes its video streaming company public, and it's already a broken IPO. Lousy timing, red ink, and uninspiring returns for China's previously publicly traded video sites didn't help.

It was a rough debut for iQiyi (IQ -2.94%) last week. Baidu's (BIDU -0.06%) fast-growing video streaming subsidiary went public at $18 on Thursday, and it wasn't pretty. The stock opened at $18.20, far from the opening pop we've see with other hot debutantes, but still a respectable first trade. Things only got worse from there. The shares slid all day, closing at $15.55.

A 14% slide on your first day of trading isn't a good look, but it was easy to see why the market would be hesitant to hop on the iQiyi train. Let's go over a few of the reasons investors stayed away from the young stock.

The iQiyi app in action.

Image source: iQiyi.

1. The timing was lousy

An iQiyi debut a year ago, or even a few weeks ago, would've probably been well received. Chinese growth stocks were hot, and iQiyi certainly fits the bill. Revenue soared 55% to hit $2.7 billion last year. However, China's dot-com darlings had come under pressure heading into last week's debut, and things got even harder when President Trump announced tariffs he wished to impose across several product categories. 

A trade war isn't fun, and even if iQiyi doesn't play a direct hand in any of the products involved in the suggested retaliatory tariffs, it does give stateside investors pause about buying into Chinese equities. Under a kinder climate, one of China's largest tech IPOs would've been a winner.

2. Monetizing video profitably is hard

As fast as iQiyi's top line is moving, the company is still mired in red ink. Net losses are also widening, a bad look look for a dot-com debutante in 2018. The days of simply applauding an internet company because it's attracting eyeballs are long gone. 

The silver lining is that iQiyi's big investments in content and marketing are starting to pay off in terms of converting more of its free users into paying users. The number of daily active users has nearly doubled over the past two years, but its premium user base has popped nearly fivefold in that time. There's a lot to like about iQiyi's emergence as a premium service, but with big deficits growing even larger last year, it's a hard sell for some investors.  

3. Chinese video sites have stumbled on the public stage

iQiyi was able to raise $2.25 billion -- for Baidu and for itself -- by selling 125 million shares last week, but it's not the first video streaming site to court stateside investors. A few years ago we had Youku and Tudou as publicly traded platforms. The two companies were also growing quickly and posting large losses, but they never become hot targets for growth investors. 

Youku and Tudou eventually merged, and then two years later the combined company was acquired in a $4.8 billion deal. iQiyi's market cap at the $18 IPO price if we value both classes of shares the same would be north of $12 billion after the offering. iQiyi is generating a lot more revenue than Youku Tudou did when it got snapped up, but investors with fresh memories of Youku and Tudou may be thinking twice about investing in this niche again.  

Add it all up, and the stage was set for iQiyi to come up short on Thursday. Baidu also failed to rally on Thursday, given its controlling stake in iQiyi. The pessimism could be overdone at this point, however, especially with iQiyi making major headway in growing both its revenue and its premium subscribers. 

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool has a disclosure policy.

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Stocks Mentioned

iQIYI, Inc. Stock Quote
iQIYI, Inc.
IQ
$2.97 (-2.94%) $0.09
Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$118.75 (-0.06%) $0.07

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