iQiyi (NASDAQ:IQ), a leading online video streaming company in China, released its fourth-quarter and full-year earnings results last week for the year ended Dec. 31, 2020. The results show quarterly revenue fell 1% year over year while full-year revenue rose 2%.
There was plenty of other useful data points provided in the report, including three takeaways that investors and potential investors should know about when considering this tech stock.
1. iQiyi reported some challenging numbers
Once a darling among growth investors, iQiyi saw revenue growth turn negative in the third quarter of last year.
This bleak performance continued in the final quarter of 2020, with revenue down by 1% to 7.5 billion yuan ($1.1 billion at current currency rates) amid lower income from membership services and online advertising services. Full-year revenue grew by 2% year over year, which lagged 2019's growth rate of 16%.
On a slightly positive note, operating loss for the quarter narrowed by 48% to 1.3 billion yuan ($200.4 million) thanks to lower content cost. As a result, the loss margin fell from 34% in the same period of 2019 to 18%. Similarly, operating loss declined by 35% from last year to a loss of 6 billion yuan ($925.7 million) this quarter.
iQiyi further guided that revenue will continue to fall in the first quarter of 2021, down by 2% to 8% year over year. For a growth company like iQiyi, these numbers (the latest result and revenue guidance) are downright ugly, suggesting more pain ahead for the company.
2. IQiyi's subscribers continue to fall
The main issue that investors should pay attention to is the fall of iQiyi's subscriber numbers, down by 5% year over year to 101.7 million. This headwind is worrisome, especially if we consider that the main investment thesis for iQiyi is that the company can continue to grow its subscribers and revenue over time, which will help it gain operating leverage and eventually hit profitability.
A subscription price hike in 2020 is likely the main culprit driving subscriber churn at the moment. If that is the case, it's possible the growth trend will resume.
But on a deeper level, the declining subscriber trend might indicate that iQiyi is losing out to other competitors like Bilibili, ByteDance's Douyin, and Kuaishou. For perspective, Bilibili grew its premium subscribers by 110% year over year to 12.8 million in the third quarter of 2020. Comparatively, iQiyi's subscribing members fell by 1 million in the same period.
With more entertainment options such as live-streaming, short video, and others, Chinese consumers have plenty of choices. And as the competition for eyeballs continues to intensify, iQiyi has to up its game to retain and also grow its paying members. If it fails to do that, it's almost impossible for the company to reach profitability in the foreseeable future.
3. iQiyi's cash burn remains high
iQiyi has been a loss-making company since its early days, with its net loss reaching 10.3 billion yuan in 2019. It remained in the red -- a net loss of 7 billion yuan ($1.1 billion) -- in 2020 thanks to its continued investments in content.
Growth investors might view such investments as necessary to grow market share in the Chinese entertainment industry. But there's a risk that iQiyi's growth might not materialize, and the declining subscriber count is an early sign of that. Even if such a trend is later proven to be temporary -- say due to the recent price hike -- iQiyi's huge losses mean its cash and short-term investments of around 14.3 billion yuan ($2.2 billion) won't last for more than two years. And that's after it raised $1.5 billion in stock and debt recently.
In other words, investors should pay close attention to the company's operating cash flow and cash position in the coming quarters. Any substantial rise in cash usage will be a red flag, especially if revenue continues to contract during that same period.
What it means for investors
iQiyi has long been dubbed as the Netflix of China thanks to its leading position in the entertainment industry.
Lately, it is becoming increasingly clear that the company is facing enormous challenges to scale its business thanks to the fierce competition in China's entertainment industry, as well as the capital-intensive nature of its business.
And though iQiyi will likely remain an important player in the Chinese video-streaming industry, investors should expect a volatile ride in the coming quarters as the company addresses the various challenges across its business.