Please ensure Javascript is enabled for purposes of website accessibility

Why iQiyi Stock Dipped 4.66% Last Month

By Keith Noonan - May 11, 2020 at 8:39AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Allegations of fraud sent the streaming company's stock lower in April.

What happened

Shares of iQiyi (IQ 2.92%) slumped 4.66% in April, according to data from S&P Global Market Intelligence. The Chinese video-streaming stock fell despite significant momentum for the broader market last month.

^SPX Chart

^SPX data by YCharts

iQiyi stock slumped early in April after a short-seller published an analysis with a bearish outlook on the business and allegations that the company had engaged in fraudulent reporting practices. The stock's dip last month came on the heels of a 20.6% valuation slide in March. 

A television screen and a person using a mobile phone.

Image source: Getty Images.

So what

Wolfpack Research published a note on iQiyi on April 6, alleging that the streaming company had engaged in fraudulent practices and inflated its reported 2019 revenue by somewhere between 27% and 44%. The report also claimed that iQiyi inflates its user numbers by between 42% and 60% and that the company inflates its costs to hide its inflated sales numbers.

Wolfpack's report highlights alleged discrepancies between deferred revenue reported from the company's initial public offering (IPO) prospectus and Chinese credit report data:

We also obtained Chinese credit reports for all of IQ's VIEs [variable interest entities] and WFOEs [wholly foreign owned enterprises] since 2015. When compared to IQ's prospectus, we found that the deferred revenues reported to the SEC were inflated by 261.7%, 165.5%, and 86.2% in 2015, 2016, and 2017, respectively. Deferred revenue is a balance sheet account that arises when customers prepay for a service to be delivered in the future. Because IQ's subscription customers prepay, most of its revenues are a function of deferred revenue. These pre-IPO overstatements inherently cause IQ's post-IPO revenues to continue to be overstated. 

iQiyi published a press release responding to Wolfpack's allegations on April 7, stated that it believed Wolfpack's report contained numerous errors, unsubstantiated statements, and misleading conclusions. iQiyi also stated that it has always been, and will remain, committed to high standards of corporate governance and transparent disclosure in compliance with SEC and Nasdaq standards.

Now what

iQiyi stock has regained some ground in May's trading. The company's share price is up roughly 3% in the month.

^SPX Chart

^SPX data by YCharts

iQiyi is scheduled to report quarterly results after the market closes on May 18. When the company reported fourth-quarter earnings at the end of February, it laid out a target for revenue between 7.1 billion yuan ($1.02 billion) and 7.52 billion yuan ($1.08 billion), representing year-over-year growth between 2% and 8%. 

iQiyi trades at roughly 2.7 times the average analyst target for this year's sales.

Keith Noonan owns shares of iQiyi. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

iQIYI, Inc. Stock Quote
iQIYI, Inc.
$3.88 (2.92%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.