Please ensure Javascript is enabled for purposes of website accessibility

SEC Investigation Sinks iQiyi and Baidu Shares

By Danny Vena - Aug 14, 2020 at 1:36PM

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

The Chinese search leader and its streaming unit are facing a regulatory probe into fraudulent reporting.

Baidu (BIDU -1.61%) and its offshoot iQiyi (IQ 0.26%) reported mixed financial results after the market close on Thursday, but the bigger story was the confirmation of a regulatory probe into the Chinese streaming giant.

iQiyi revealed that the U.S. Securities and Exchange Commission is investigating the company in the wake of a report issued by noted short-seller Wolfpack Research back in April. iQiyi also admitted for the first time the existence of an internal investigation into allegations contained in the report. The company says it has hired "professional advisors" who are conducting "an internal review into certain of the key allegations in the Wolfpack Report." 

Close up of a woman holding financial documents and a pen reviewing papers at an office desk.

Image source: Getty Images.

The Wolfpack report, titled iQiyi: The Netflix of China? Good Luckin, alleges that iQiyi had been cooking the books, even prior to its 2018 IPO, by reporting fraudulent user numbers that are overstated by as much as 60%. The report goes on to say that iQiyi's revenue was inflated as high as 44% to correspond with the overstated user numbers. 

Wolfpack claims to have interviewed 1,563 Chinese consumers late last year, finding that many iQiyi customers had access to the higher tiers of the service via dual memberships with Xiaomi TV and e-commerce provider (JD -2.27%). The report alleges that iQiyi reported the sales on a gross basis, thereby inflating its total revenue. Wolfpack also contends that the company has consistently inflated deferred revenue from longer-term subscriptions, while overstating the value of barter transactions resulting from content trades with partners.

The report's title draws comparisons to scandal-plagued Luckin Coffee (LKNC.Y 1.09%), which was found to have committed a massive fraud, with company executives fabricating more than $300 million in revenue. Luckin was subsequently delisted from the Nasdaq Stock Market.

Shares of Baidu and iQiyi have slumped 6% and 15%, respectively, as of this writing.


Danny Vena owns shares of Baidu, iQiyi,, and Netflix. The Motley Fool owns shares of and recommends Baidu,, Luckin Coffee Inc., and Netflix. The Motley Fool recommends iQiyi and Nasdaq. 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

Baidu, Inc. Stock Quote
Baidu, Inc.
$137.82 (-1.61%) $-2.25
iQIYI, Inc. Stock Quote
iQIYI, Inc.
$3.91 (0.26%) $0.01, Inc. Stock Quote, Inc.
$61.91 (-2.27%) $-1.44
Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
$13.93 (1.09%) $0.15

*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 08/07/2022.

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.