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Why iQIYI Stock Tumbled Today

By Timothy Green - Aug 14, 2020 at 10:44AM

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A mixed earnings report coupled with an SEC investigation was bad news for the Chinese stock.

What happened

Shares of iQIYI (IQ -1.06%) sank on Friday after the Chinese streaming company reported its second-quarter results. The headline numbers were mixed relative to analyst expectations, and iQIYI disclosed an SEC investigation stemming from a report from short-seller Wolfpack Research published in April. The stock was down about 13% at 10:45 a.m. EDT.

So what

iQIYI reported second-quarter revenue of 7.4 billion renminbi, equivalent to $1 billion. This was up 4% in local currency from the prior year period, but it fell short of the average analyst estimate by about $60 million. The company ended the quarter with 104.9 million subscribers, up 4% year over year.

A man holding his head looking at charts.

Image source: Getty Images.

Membership services revenue rose 19% to $572.7 million, and content distribution revenue soared 66% to $121.8 million. The online advertising services business didn't fare as well, suffering a 28% revenue decline to $224.5 million due to the macroeconomic environment in China.

iQIYI reported a net loss per American depositary share (ADS) of $0.28, beating analyst expectations by $0.21. For the third quarter, the company expects revenue growth between negative 6% and flat.

Now what

In April, Wolfpack Research published a report accusing iQIYI of fraud. Wolfpack claimed the company was overstating its user numbers by as much as 60% and hiding it by inflating expenses and content costs.

iQIYI disclosed along with its second-quarter numbers that the SEC's Division of Enforcement was requesting certain financial and operating records dating from Jan. 1, 2018, along with documents related to certain acquisitions and investments cited by the Wolfpack report. The company is cooperating with the SEC.

While it's too early to say whether fraud has occurred at iQIYI, the company would be the second Chinese high-flyer to be outed as a fraud in recent months if Wolfpack's claims bear out. Earlier this year, Luckin Coffee was found to have fabricated a substantial portion of its sales.

Including Friday's decline, shares of iQIYI are now down about 12% since the start of the year.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

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