One of this year's hottest IPOs has cooled off after posting fresh financials earlier this month. Shares of iQiyi (NASDAQ:IQ) have fallen nearly 10% since the company served up poorly received second-quarter results last week. At least one analyst would go on to downgrade the stock in the wake of the report. 

China's leading streaming-video provider didn't necessarily have a bad quarter. Revenue soared 51% to hit $932.5 billion, roughly in line with market expectations and cementing its pole position in a booming industry. iQiyi's loss per share widened to a larger-than-expected deficit of $0.43 a share, but Mr. Market isn't judging the dot-com speedster based on its bottom-line results. However, the stock's heady gains leading up to its quarterly update upped the expectations. Merely matching Wall Street's ambitious growth target was never going to be enough, especially after blowing targets away in its first quarter as a public company. 

An iQiyi personalized movie theater.

Image source: iQiyi.

Streaming along

iQiyi's capacity to bounce back will depend on its ability to keep its big subscriber gains coming. Usage has never been an issue at iQiyi, but the recent push to get freeloaders to convert into premium subscribers is a game changer. iQiyi has seen its subscriber count grow by 75% to 38.3 million over the past year.   

Online ad revenue rose a respectable 45% in iQiyi's second quarter, but it's the 66% surge in membership services revenue -- a line item which by the end of this year could overtake online advertising as the leading top-line contributor -- that's getting investors excited. Getting folks to pay up for a service that is typically free is no small feat in the world's most populous nation.

Not everyone is convinced that iQiyi's a winner at this point. Piyush Mubayi at Goldman Sachs downgraded the stock from buy to neutral last week. In an odd twist, he's lifting his price target from $23 to $30, a testament to how high iQiyi has moved in the months since its springtime debut at $18. It's also perhaps a cautionary tale for analysts to update their reports on fast-moving investments.

He feels a higher price goal is warranted given the improving margins and encouraging average revenue per user trends, but the stock climbing to the low $30s finds Mubayi's rosier outlook for iQiyi's fundamentals blocked by the quick-rising shares. It happens, but it's probably one of the more encouraging analyst downgrades that you will ever see. 

Prospects remain strong for iQiyi. It continues to use its market leadership to build out its content offerings as it gets more of its ad-supported viewers to hop on over to the more lucrative side of the paywall. The stock's huge run -- iQiyi would go on to nearly triple between its post-IPO lull in early April to its peak in mid-June -- may have warranted some cooling off after a quarter that was largely in line with expectations, but great things will happen if paying users keep flocking to the platform.