Once deemed the Netflix of China, iQiyi (IQ -2.62%) hasn't lived up to the expectations that come with that flattering title, at least not in the past couple of years. Even as streaming services saw a boost in viewership amid the pandemic, iQiyi's stock underperformed the broader market last year. Things have been even worse for the tech company since January.
Shares of iQiyi have dropped by more than 75% this year. If there is a rebound in the cards, this presents a wonderful opportunity to scoop up its shares on the dip -- at less than a third of its initial public offering price. Let's look into iQiyi's business and decide whether it is worth jumping aboard this ship right now.
The financial results
iQiyi's latest quarterly update was underwhelming. Total revenue came in at $1.2 billion, 6% higher than the prior-year quarter. That was more or less in line with iQiyi's guidance. Management had previously said it expected revenue between $1.18 billion and $1.25 billion for the quarter, representing top-line growth between 6% and 12% year over year.
But the reason iQiyi's top line came in at the lower end of its guidance is problematic. According to CEO Yu Gong, the company "experienced significant uncertainty in terms of content scheduling, which resulted in softer than expected top-line performance." Streaming platforms thrive on their ability to deliver fresh content to their viewers.
iQiyi is currently experiencing delays in its content production due to the pandemic. According to Yu Gong, the company's movie launches currently come in at less than 50% of its 2019 levels. Meanwhile, television series are currently being released at only 33% of their pre-pandemic levels on the streaming platform.
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These dynamics were bound to hurt the company's subscriber count and its top line. That's to say nothing of the tough regulatory challenges it faces in China, which are also affecting its ability to deliver content to its viewers. In August, iQiyi announced it was ending various talent competitions because of the Chinese government's crackdown on excessive fan culture.
To make matters worse, iQiyi remains deeply unprofitable. In the third quarter, the company reported a net loss of $268.4 million, compared to the net loss of $188 million it reported during the year-ago period. Last but not least, iQiyi's subscriber count as of the end of the third quarter was 103.6 million, down from the 104.8 million subscribers it had at the end of the third quarter of 2020.
Too many headwinds
Red ink on the bottom line does not mean a company is best avoided -- not even close. But unless said company is posting strong top-line growth and shows a clear path to profitability, investors should remain skeptical.
iQiyi's current content-related problems won't vanish overnight. The company itself admitted that much. To quote CEO Yu Gong again, "We expect the uncertainty [related to content scheduling] to largely remain, so we are proactively adapting ourselves to the new market environment."
While COVID-related delays could eventually subside when the pandemic ends (whenever that happens), government-imposed restrictions add significant uncertainty to iQiyi's long-term outlook. Furthermore, the company faces stiff competition, most notably from Tencent's Tencent Video, among other popular platforms in China. Tencent Video had 129.3 million subscribers at the end of the third quarter, representing an 8% year-over-year increase.
iQiyi's plan to stage a rebound will rely on producing and releasing excellent content to attract new subscribers. But the competitive nature of the industry, coupled with regulatory pressures, will complicate this task. Also, producing content is expensive, and iQiyi is already deeply unprofitable. The company does not look anywhere close to turning in regular profits. To be fair, iQiyi can count on the financial support of its majority shareholder, Baidu. The China-based tech giant owns a 52.2% stake in iQiyi.
While this backing from Baidu holds some weight, iQiyi faces too many headwinds for this alone to make it a buy. Content delivery issues coupled with slow revenue growth and net losses make the company's prospects look bleak. These facts all paint a clear picture: iQiyi is unlikely to turn things around anytime soon. In my view, it would be best to jump off this sinking ship while there's still time, as there are plenty of other excellent tech stocks to consider buying.
