A Short History of iQiyi

On this episode of Industry Focus: Tech, host Dylan Lewis is joined by Fool.com contributor Danny Vena to discuss iQiyi (IQ 3.84%), the "Netflix of China."

A full transcript follows the video.

This video was recorded on May 11, 2018.

Dylan Lewis: Danny, we both love Netflix -- you as a shareholder, me as a binger. It seems like the streaming subscription model is something a lot of people can get behind. Today, we're going to be talking about a company in China that has taken note. You want to tee up what we're going to be discussing today?

Danny Vena: Absolutely. iQiyi, which was a spin-off from the Chinese Google, Baidu (BIDU 0.74%), they started off strictly following the Hulu model. They began as a company that used strictly advertising to generate their revenue, get as many subscribers in the door as they could, but these people were not paying anything. And it was fairly successful. But about 2015 or so, Baidu recognized just how successful Netflix was becoming, and as it has been the case with so many Chinese companies, they saw a model that they liked, and they copied it. So, they generated some new exclusive content, they stuck it behind a paywall, they encouraged users to sign up and pay, in their case, about $3 a month, and they've gone from there.

Lewis: Yeah. I'm sure that iQiyi appreciates the "Netflix of China" parallels. Certainly, when Matt Argersinger was first talking about this company, that's how I first got wind of it, and he used that as the pitch. I was immediately ears perked up just because, one, the subscription model has been so strong for Netflix, retention has been so good; and two, it's just such a scalable model. You have something that serves people well, and if you do it right and build out your content library, you can really scale your costs pretty quickly and enjoy some nice margins.

iQiyi is a business that operates somewhat like Netflix, somewhat like Hulu. And this really plays out in how they make their money and in their financials, right?

Vena: It does. iQiyi still generates the majority of their revenue from advertising. When they filed for their IPO, the information that they provided to the SEC essentially was that 47% of their revenue was still generated from advertising. They also earned some money from this subscription revenue. And then, they also have a bucket called Other. Some of that is a product of content distribution. It's not entirely like Netflix or Hulu, because they sell merchandise that are tied to some of their original content. They have video games, they have content distribution. So, they also have another growing bucket of revenue, which is unlike what we're used to seeing.

Lewis: And as for what growth looks like for that revenue base, in the most recent quarter, iQiyi produced revenue in the high $700 million range. There are some fluctuations, depending on the period you're looking at, due to currency, because this is a Chinese business. But, that was up 57% year over year. While that's pretty good growth, this was actually something that the market was a little disappointed in, Danny.

Vena:​ And I think the market got that wrong, personally, because this is on top of 55% growth in the prior year. So, having several years in a row of exceeding 50% growth for any company is pretty laudable.

​Lewis:​ Yeah. I think you have to be pretty thrilled with that kind of growth. This is kind of like the Facebook thing, where it defies logic that a company can continue to put up 40% or 50% growth year over year on top of 40% or 50% year over year growth. But when you have a product that's that attractive, they just manage to do it.