Shares of iQiyi (IQ 5.19%) tumbled 5% on Tuesday, following news that China's leading streaming video service would be raising $1.05 billion through a convertible senior notes offering. The unsecured obligations will mature in six years.
One of the reasons that companies go public is to have an easier way of raising money, and iQiyi is certainly within its right to go through with this proposed offering. Securing compelling video content isn't cheap, and analysts don't see iQiyi turning a profit until 2022 at the earliest. Everything about the transaction makes sense, but it's also not a surprise to see a wave of selling following the news.
Companies turn to convertible debt as a way to secure financing at lower interest rates than traditional bond offerings. Investors are willing to put up with a lower coupon in exchange for the possibility of equity upside if the stock keeps moving higher. Existing investors naturally don't like seeing iQiyi give up the equity kicker for the sake of cheap financing.
iQiyi is engaging in capped call transactions as a way to curb the impact of dilution if notes are converted into stock positions, but obviously those safeguards come at a price. The end result is that it's clear that the market isn't happy, and it certainly seems as if someone knew that this offering was in the works. Shares of iQiyi have fallen for six consecutive trading days, sliding 17% in the process.
Even after the past week and change of the shares sliding, iQiyi remains one of this year's biggest winners. The stock has risen 54% in 2019.
Check out the latest earnings call transcript for iQiyi.
iQiyi is doing a lot of things right. Revenue rose 55% in its latest quarter, as a 76% surge in membership services revenue helped lift a ho-hum 9% increase in ad revenue. It's a trade worth making, as it means that iQiyi is doing a better job of getting China's largest online video streaming audience to pay up for its content. There are now 87.4 million paying users on the platform. iQiyi has all the right traits to be a market beater in the coming years, but Tuesday's sell-off is not a surprise.
The problem with the offering is that iQiyi didn't need the money now. It began the year with roughly $1.9 billion in cash and short-term investments on its balance sheet, and just three months ago it completed another convertible senior notes offering that brought in $736.2 million in proceeds. This just seems like a greed-speckled move, trying to cash in on the stock's heady rise since bottoming out in late December. The market's response on Tuesday is letting iQiyi rightfully know that a convertible note offering shouldn't be a quarterly occurrence.