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3 Reasons iQiyi Stock Will Bounce Back

By Rick Munarriz – Apr 4, 2018 at 3:09PM

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China's most popular video platform is a broken IPO a week into its publicly traded tenure. It doesn't have to stay that way.

It's been a rude awakening for iQiyi (IQ -2.58%) shareholders. China's most popular video-streaming platform went public at $18 last week, only to close 14% lower on its first day of trading. The stock began to inch higher in the first two trading days of this week, but by Wednesday morning it was back to hitting new all-time lows. 

Bad timing can kill a promising growth stock, and hitting the market at a time when a trade war with China looms and volatility is high can turn what could've been a darling into a dud. Thankfully for iQiyi investors, a broken IPO isn't a life sentence. Many stocks that initially fall out of favor do bounce back, and Baidu's (BIDU 1.69%) fast-growing video subsidiary has several catalysts that could turn its fortunes around. Let's go over three things working for iQiyi right now, even if the stock price doesn't bear that out. 

iQiyi mobile app in action.

Image source: iQiyi.

1. Wall Street rewards growth eventually

The popularity of iQiyi continues to grow at an encouraging clip, and that includes the platform's ability to monetize its traffic. We've seen revenue soar 111% in 2016, followed by a 55% spurt last year. 

Decelerating growth is understandable. We'll find out in the next few weeks what analysts feel will be iQiyi's growth rate for the coming years, but it's safe to figure that we're eyeing double-digit percentage growth for at least the next few years. Despite the company's lack of profitability -- where deficits are actually widening -- the market can't ignore revenue growth forever. If iQiyi's gaining ground as a platform, the stock price will eventually reflect that. 

2. Premium subscriber growth is outstanding

There's no shame in saying that iQiyi is a platform enjoyed mostly by freeloaders. A whopping 88% of its 421.3 million monthly active users put up with online ads so they can enjoy the growing content offerings for free. One of last month's hottest tech IPOs actually has just 2% of its user base as premium customers. 

The good news is that the conversions are coming along nicely. We've seen premium subscribers at iQiyi grow from 10.7 million in 2015, to 30.2 million in 2016, to 50.8 million in 2017. Over those three years, we've seen premium subscribers go from 3% of its user base to 12%. The trend is unmistakable, and if iQiyi goes along at that pace, at some point in 2018 it will command more than half as many paying users as the world's leading online video service.    

3. Underwriters have a lot of hustling to do

No one notices when an obscure debutante belly flops, but it's a different story when we're talking about a high-profile company. iQiyi and parent company Baidu are big names, and that means that underwriters tied to this offering will have some explaining to do if the stock is still under $18 in a few months. At least six major underwriters are named in the prospectus.

Underwriters here stuck their clients with a ton of stock at $18 last week. We'll have to wait a few weeks before they initiate coverage of the stock, but it's hard to fathom that being anything short of glowing testimonials. Unless legitimately negative news breaks between now and then, the underwriters don't have much of a choice but to put out bullish notes with price targets north of $18. The bullish initiations are typically discounted by experienced investors, but it will be a wave of affirmation all the same. 

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
$2.64 (-2.58%) $0.07
Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$119.48 (1.69%) $1.99

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