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So Soon After Its IPO, Is iQiyi a Buy?

By Motley Fool Staff – Updated May 15, 2018 at 11:42AM

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Having a large successful company as a mentor may give iQiyi an edge.

On this episode of Industry Focus: Tech, host Dylan Lewis is joined by contributor Danny Vena to discuss how iQiyi's (IQ -9.03%) connection to Baidu (BIDU -0.03%) may give investors an advantage compared to a traditional start-up.

A full transcript follows the video.

This video was recorded on May 11, 2018.

Dylan Lewis: I have gone on the record in the past in talking about how I do not like buying into recent IPOs. I think, even in the Never Will I Ever week, I said that I'd never buy shares of anything that hadn't been trading for at least six months, just because I like seeing that extended period of results and a longer track record, let some of the hype die down a little bit.

I think this might be one that I asterisk, Danny. [laughs] I did say never will I ever, but I think there's a lot of really interesting stuff going on here, and I think there are some things that make this somewhat outside of the standard IPO for me. This is something that has been spun out of a large and successful business. If you're a Peter Lynch follower at all and you enjoy his investing philosophy, he loves the idea of a company being spun out, because you allow that company to have their growth and their value realized in a way that maybe it wouldn't be when it's umbrella-ed under a larger business. I also look at that IPO slightly differently than I would a standard one because it's not as much of a cash-out for early investors. You look at Baidu, and they're still maintaining a very large stake in this company, and they're maintaining the controlling interest in this company.

Danny Vena: Right. Baidu is still the majority shareholder. I looked at some numbers yesterday, and if memory serves, they're still somewhere around a 60% owner of iQiyi, and they're also still mentoring them, they're still providing them with the artificial intelligence that they need to decide what their subscribers want to watch. There's a lot to be said about a smaller company having a really large, successful business -- I mean, there's really not many businesses in China that are more successful than Baidu -- but, having that company as a mentor, as a guide, supporting them, providing them data, I think that's a lot different than a company that's just a start-up that's gone out to an IPO.

Lewis: Yeah. They get particularly attractive to me, too, because as it stands, they're roughly a $14-15 billion business. You look at Netflix (NFLX -1.67%) as a $150 billion business, and it's easy to extrapolate that out. You have to do some puts and takes there, because this is a company that only operates in China, whereas Netflix is in 190 countries at this point. I think it just demonstrates that there's a lot of growth in this space. And, as someone that's kind of a pure-play, it's a super interesting company, certainly one that's on my short-term watch list. A couple of the other names that we talked about today, Tencent in particular is another company that I'm watching. But, the streaming video space in China just seems so poised for growth right now.

Vena: It's crazy. I think the consumers in China are a few years behind us in terms of, Netflix started their streaming video back in 2007. iQiyi started their business in about 2010. And the modeling of Netflix only started in mid-2015. So, they're several years behind, I think there's still a lot of growth there.

The runway is pretty incredible. It's never going to reach the scale of a Netflix. China has about 1.3 billion people, compared to the seven billion in the world that Netflix has as potential customers. Obviously, there are going to be some places where you're not going to have the availability of fixed broadband, where data rates on cellphones are not going to be conducive to streaming video. But, when you take those out, you take out the consumers that really couldn't afford a service like that, the poverty-level consumers, you still have a really huge runway.

I've read some estimates that said that potential for the streaming market in China right now is somewhere in the neighborhood of 600 to 700 million. And, it's climbing, as you have a growing middle class in China, you have more urban millennials who are tech-savvy and who are making enough money to afford these services. So, I think the runway is pretty large.

Lewis: That's all to say, there are a lot of megatrends that are pushing this company. It's something that I'm probably going to look to opportunistically start a small position in and maybe add to over the next couple of months. Danny, is this something that you're interested in as a stock to own?

Vena: It's a company that ... again, my inclination at first is to not go at a fresh IPO, having been burned in the past. But looking at this company, there are a lot of outlying factors. There are a lot of asterisks, as you put it. I was actually looking to make an investment in this company in the last week or two. I think that's firmed up in my mind a little bit. I'll probably be doing the same thing as you some time in the coming weeks or months, I'll be looking to establish a position.

Lewis: Credit where credit is due on this-like I said, Matt Argersinger put this company on our radar, so thanks to him for tipping us off. And thanks to you, Danny, for hopping on the show and talking about it with me.

Danny Vena owns shares of Baidu and Netflix. Dylan Lewis has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu and Netflix. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

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Stocks Mentioned

iQiyi Stock Quote
$2.62 (-9.03%) $0.26
Netflix Stock Quote
$236.73 (-1.67%) $-4.01
Baidu Stock Quote
$123.26 (-0.03%) $0.04

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