One of this year's hottest IPOs is having a cruel summer. Shares of iQiyi (NASDAQ:IQ) begin this week trading 43% below the highs they set two months ago.
China's top dog in the realm of streaming video has come under selling pressure for a few reasons, but it remains one of this year's more successful debutantes. Even after the sharp summertime correction, the shares remain 47% above iQiyi's March IPO at $18. Let's go over why investors have bailed on the stock after it nearly tripled at its springtime peak.
1. Chinese internet stocks are out of favor
It's not just iQiyi that has corrected this summer. China's five largest publicly traded internet stocks have fallen by at least 18% and as much as 37% since their springtime highs. Investors have soured on China's dot-com darlings.
Chinese regulators have been flexing their muscles. The Cyberspace Administration of the People's Republic of China has been inspecting major internet platforms featuring short-form video content. There's also been a crackdown on the violence and gambling aspects of online games, resulting in a freeze on approval of gaming licenses. In short, the market gets nervous when China's hand gets heavy in dictating the growth of online companies.
2. iQiyi's second quarter failed to impress
Revenue soared 51% in iQiyi's latest quarter. That was in line with market expectations, but a sequential decline from the first quarter's showing. And iQiyi clocked in with a larger-than-projected loss for the period. It may have surpassed expectations in its first quarter as a public company three months earlier, but merely keeping pace with Wall Street pros isn't going to cut it with growth-spoiled investors.
Piyush Mubayi at Goldman Sachs would go on to downgrade the stock following this month's mixed quarterly report. He conceded that iQiyi's improving margins and increasing average revenue per user are good signs, but ultimately felt that the stock's lofty valuation already had a lot of its success baked into the share price.
3. The stock rose too high too soon
It's hard to stomach the stock's 43% slide since peaking in mid-June, but investors who got in around the time of its late March IPO can't complain. iQiyi wasn't a scorching rookie out of the gate. It may have gone public at $18, but it closed its first day of trading at $15.55. It would take the stock nearly two weeks to claw its way back to close above its IPO price.
By the time iQiyi stock peaked in June, it was trading three times higher than its early April low, a monster gain in less than 10 weeks of trading. The blowout first quarter and investor enthusiasm helped fuel the hype, and now we're seeing what a ho-hum second quarter and market disdain can do to a former bottle rocket.
The good news is that iQiyi remains a big winner in 2018. The stock still begins this week trading 72% above the all-time low it set during its fourth day of trading in early April. Expectations are reset, and now it's just a matter of waiting until the water is exactly right for investors to jump back into the Chinese growth stock waters. It's been a brutal summer for iQiyi investors, but it doesn't have to stay that way.