What happened
iQiyi (IQ 3.53%) shareholders were beating the market on Friday as the stock gained 15% at the open before settling to a 4.2% increase as of 1:17 p.m. ET. The surge helped put the Chinese streaming content specialist back into positive territory for the year. At one point in March, it was down by nearly 60%.
The rally was powered by rebounding sentiment regarding Chinese stocks in general, along with rising optimism that iQiyi in particular will be able to protect its U.S. stock listing.
Image source: Getty Images.
So what
Shares of iQiyi -- and many of its Chinese tech sector peers -- fell Thursday after the Securities and Exchange Commission added it to a list of companies that are at risk of being delisted from U.S. exchanges for failing to meet new auditing standards imposed by 2020's Holding Foreign Companies Accountable Act. Investors weren't as worried about that issue Friday, in part thanks to iQiyi's explanation of the problem.
Management said in a press release late Thursday that its designation was triggered by its use of an accounting firm that can't be inspected. However, executives said iQiyi is "exploring possible solutions" to the issue, and has the time to find one given that a delisting would only occur after several consecutive years during which its accounting firm failed to meet the Act's standards.
Inventors were also happy to hear that regulatory changes may resolve this issue for iQiyi and its peers. Chinese regulators are reportedly working on a deal to open up local firms for auditing. In that context, it makes sense that iQiyi stock would gain back the ground it lost earlier in the week.
Now what
Shareholders' long-term returns will ultimately depend on how well iQiyi's business rebounds following its recent stumble. The company has been shedding subscribers for several quarters now, after all.
Sure, management is slashing costs, and those initiatives are helping boost profit margins. But iQiyi needs to start demonstrating that it can reliably grow its membership base for the stock to have a chance at delivering market-thumping returns over several years.
