Baidu (NASDAQ:BIDU) and its offshoot iQiyi (NASDAQ:IQ) 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."
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.com (NASDAQ:JD). 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 (OTC:LKNC.Y), 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.