What happened

Shares of iQiyi (NASDAQ:IQ) rose 39.8% in June, according to data from S&P Global Market Intelligence. iQiyi had traditionally been labeled the "Netflix (NASDAQ:NFLX) of China," but the truth was actually more complicated. China has not one clear streaming leader, but three: iQiyi; Youku Tudou, owned by Alibaba Group Holding (NYSE:BABA); and Tencent Holdings (OTC:TCEH.Y) video.

In June, news agencies citing people familiar with the matter reported that one of those large rivals was circling iQiyi as a possible acquisition.

Over the shoulder view of young woman streaming video on her laptop sitting on her couch.

Image source: Getty Images.

So what

In mid-June, reports surfaced that Tencent was looking to acquire a controlling stake in iQiyi, currently majority-owned by fellow large-cap internet giant Baidu (NASDAQ:BIDU). While both Tencent and iQiyi have achieved remarkable growth and scale, with each company recently reporting over 110 million subscribers, profits have been hard to come by in the sector.

Both platforms have paid subscriptions as well as ad-supported tiers, and ad revenue has been decimated by the COVID-19 pandemic and competition from short-form video upstarts like Tik Tok owner ByteDance. Meanwhile, content costs have also been rising on all platforms. The combination has led to growing losses for all the Chinese streaming video players.

But deep-pocketed Tencent, which is still quite profitable overall thanks to its online games, social media, fintech, and cloud divisions, is in a much better position to consolidate the space. In addition, Tencent has experience consolidating competitive industries and turning them into profitable businesses. Should it follow through and do the same with iQiyi, it could benefit all players involved.

Now what

While rumors are one thing, no deal has been officially announced, so it may or may not happen. In addition, Oppenheimer analyst Bo Pei also recently downgraded iQiyi on concerns that subscriber growth might be stalling out. Since a large part of the buyout premium might already be reflected in this Chinese stock, investors may be better off waiting for more details to emerge before buying into iQiyi or adding to an existing stake.