Since its public-market debut in March, iQiyi (NASDAQ:IQ) -- often called the "Netflix of China" -- has been a roller-coaster ride for early investors. After ending its first day of trading at $15.50, the stock had gained as much as 185% before having its stock price cut in half. The combination of a lofty valuation and escalating trade tensions between the U.S. and China have conspired to bring the entertainment provider -- along with many other Chinese stocks -- back to earth.
Investors will be watching closely when iQiyi reports the financial results of its 2018 third quarter after the market close on Oct. 30. Let's take a look at the company's most recent quarter and see if it provides any insight into what investors can expect when it reports earnings.
A surprisingly strong quarter
For the second quarter, iQiyi reported revenue of $932.5 million, a gain of 51% year over year in local currency and when adjusting the prior-year results in accordance with new accounting standards. This easily topped analysts' expectations and the high end of management's forecast. A net loss of $316.9 million resulted in a loss per share of $0.45, worse than the $0.31 loss predicted by analysts.
Growth was solid across each of iQiyi's major segments. Membership revenue jumped 66% year over year, while online advertising services climbed 45%. The company's two smaller segments, content distribution and "other" (from sales of things like online games and merchandising), both added to the gains, increasing 18% and 62%, respectively, compared to the prior-year quarter.
It's worth noting that iQiyi's business model actually more closely resembles Hulu than Netflix, offering a free, ad-supported tier, and a combination of exclusive and original content for paying subscribers.
Earlier this month, iQiyi held its annual iJoy conference and revealed a few tidbits that will be of interest to investors. The company said it plans to introduce more than 200 new programs in 2019, which will include movies, variety shows, animation, comics, and live-streaming programs. iQiyi will also be renewing or expanding some of its most successful series, including The Rap of China and Idol Producer.
The company is also tweaking its original content strategy by placing more emphasis on the production of short dramas of 12 episodes or less, which have been popular among iQiyi's subscribers. The company also plans to introduce a new show that will be formatted specifically for viewing on smartphones.
iQiyi revealed that 70-episode period drama Story of Yanxi Palace was streamed over 15 billion times. The company also the drama was widely talked about on Chinese microblogging site Weibo.
The company has also announced the results of a collaboration with its parent company, leading search provider Baidu (NASDAQ: BIDU), and Beijing Gehua CATV Network Co., a leading cable provider in China. Together, the companies introduced the Gehua Little Fruit Set Top Box. The voice-enabled device, which is integrated with artificial intelligence (AI), helps users find and watch their favorite programs across both cable and iQiyi's streaming service.
Creating original content, catering programming to the specific tastes of its market, and partnering with local cable companies to increase its market penetration...if any of these sound familiar, it's because iQiyi is using the playbook developed by Netflix, while catering to the unique tastes of the Chinese marketplace.
What to watch
For the third quarter, iQiyi is forecasting revenue of between 6.70 billion yuan to 6.98 billion yuan (between $965.4 million and $1.01 billion at current exchange rates), which would represent year-over-year growth of between 43% and 49%. The company noted that its forecast was subject to "substantial uncertainty."
Analysts' coverage is slim (with only four firms covering iQiyi), but consensus estimates are calling for revenue of $995.55 million, near the high end of management's guidance, and a loss per share of $0.44.
It's important to note that nearly all of iQiyi's business is confined to mainland China, though the company occasionally makes deals with other providers to show its content outside the country. Trade fears have taken down most Chinese stocks, but it's unlikely this will have any impact on iQiyi, creating an opportunity for investors with a longer time horizon.
While iQiyi stock has given back much of its recent gains, it's important to remember that, similar to its U.S. streaming counterparts, iQiyi is investing heavily in original content, so the company will likely be unprofitable for the foreseeable future. Combine that with its market cap of just $16 billion, and investors should expect the volatility to continue -- no matter how good the results of iQiyi's earnings report on Oct. 30.