What happened

Shares of iQiyi (NASDAQ:IQ) 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.

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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.

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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.

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