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Why iQiyi Stock Dropped Nearly 10% This Morning

By Rich Smith - May 19, 2020 at 12:24PM

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Sales growth in Q2 could be cut in half.

What happened

iQiyi (IQ -1.24%), a subsidiary of Baidu (BIDU -3.07%) known as "the Chinese Netflix," is a favorite target of U.S. short-sellers. On Monday night, iQiyi gave them a gift when its Q1 2020 earnings report showed the company losing precisely as much money as analysts had predicted it would ($0.56 per share) despite reporting better-than-expected sales of $1.1 billion.  

iQiyi shares fell as much as 9.7% in early trading on Tuesday before clawing their way back to about a 4.4% loss as of 11:35 a.m. EDT.

Chinese flag superimposed on a stock market chart

Image source: Getty Images.

So what

Sales for the fiscal first quarter grew 9% year over year, but iQiyi's losses mounted even faster, growing 61% year over year. Even more disheartening, those losses increased despite iQiyi adding subscribers, growing its user count 23% to 118.9 million.  

CEO Yu Gong blamed the poor performance on a "very challenging environment caused by the COVID-19 outbreak." On the one hand, iQiyi enjoyed surging demand from customers stuck at home by the COVID-19 pandemic, and membership revenue grew 35%. On the other hand, online advertising services revenue declined 27%, and the company's content cost continued to see moderate increases versus a year ago.

Now what

In short, about the only good news in Q1 was that revenue grew strongly, and now even that plus may go away. In preliminary guidance for Q2, iQiyi is looking for revenue between $1.02 billion and $1.08 billion for the current quarter. (No word on what the company's profits -- or losses -- might look like).

With analysts forecasting $1.08 billion, this means the company might hit Wall Street's target, but probably not. And taken at the midpoint, iQiyi's sales look likely to amount to only $1.05 billion this quarter, just 5% more than last year's Q2 -- and half as fast as it grew in Q1.

Not good.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

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Stocks Mentioned

iQIYI, Inc. Stock Quote
iQIYI, Inc.
$3.99 (-1.24%) $0.05
Baidu, Inc. Stock Quote
Baidu, Inc.
$135.23 (-3.07%) $-4.28

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