In this segment of the MarketFoolery podcast, host Chris Hill and Million Dollar Portfolio's Matt Argersinger reflect on the recently IPO'd iQiYi (NASDAQ:IQ), which Baidu spun off. Essentially, this was China's Google hiving off China's Netflix (NASDAQ:NFLX) -- so, yes, it's a big deal -- but investors may be wary about jumping into internet companies in that country. Argersinger wasn't, and he explains his take on the streaming video market there and how he did the back-of-the-envelope math that convinced him that iQiYi stock has a long upward run ahead of it.
A full transcript follows the video.
This video was recorded on April 17, 2018.
Chris Hill: Now that iQiyi is public -- you've talked about this before, is this of interest to you? Is this a stock you've already bought, or it's on the watch list? And for those who don't know, iQiyi was essentially spun out of Baidu (NASDAQ:BIDU). So, the Google of China spins out the Netflix of China. And as you said before, it seems like, if nothing else, it's a win for Baidu shareholders, because Baidu still has the ownership stake.
Matt Argersinger: Yes, big majority ownership stake. This was rare for me, I don't think I've ever done this, ever -- I bought iQiyi the day of the IPO. Historically, that's not a great time to buy a stock, the day of its IPO, because it's coming in with a lot of momentum, it's priced very high, it's goosed up the numbers, use your excuse. But, I'm just so compelled by the position of this company relative to its market opportunity, its relationship with Baidu, and the fact that it's grown subscribers in China from 10 million at the end of 2015 to more than 60 million now as of February. And I imagine, just like Netflix, they're adding several million net subscribers a month now. So, I'm very excited to see where this goes.
The Chinese market is interesting in the sense that, I think it's going to come down to a few players. They don't have the cable legacies that we have here in the U.S., there's just not a lot of competing time, in other words. So, it's really coming down to, I think, to iQiyi, controlled by Baidu, you have Tencent, which has a big video service, and then you have Alibaba, which also owns a stake in a popular video streaming service. In terms of mobile, these three are really competing for everyone's time. And I think iQiyi has a little bit of the edge right now. They have a relationship with Netflix, which I think is only going to help. But, they have some of the most popular TV shows and films in China. So, I just think a lot of people are going to gravitate to that platform.
And the stock, the market value of the company right now, $14 billion. That's less than a tenth of the value of Netflix, but it has roughly half the subscribers. That's a really simplistic view of it. There's no way I can assign the same lifetime value to an iQiyi subscriber as I can to a Netflix subscriber, but if iQiyi can become one of the leading streaming services in China -- if not elsewhere, but certainly in China -- it's going to be a much, much bigger company in the future.
Hill: Yeah. And this really is yet another industry where there's going to be more than one winner.
Argersinger: Oh, totally.
Hill: When we talk about the war on cash, and Jason Moser a year ago said, "I'm buying a basket of stocks that are competing against cash." I mean, you could do a whole lot worse than to take a chunk of your portfolio and make it the war on cable basket. [laughs] And just say, "I'm going to buy a little bit of Netflix. Sure, I'm going to throw a couple of dollars at Roku, because who knows, and throw iQiyi in there as well."
Argersinger: And Disney, with what they're doing, and eventually, hopefully by the end of this year, having a majority stake in Hulu, which I think is another one of the big players. Yeah, buy a basket of a bunch of these companies, and I think you'll do very well. And it's certainly where entertainment is going, there's no question about that.