Over the past 12 months, shares of iQiyi (IQ -2.62%) have fallen 67%. While various marketwide worries like inflation and geopolitical tensions have contributed to this horrible showing, the China-based video streaming specialist undoubtedly faces its own company-specific issues.
But there are at least two sides to every story, and some might argue that iQiyi is a tech stock worth buying at these lower levels. Let's weigh the risks against the potential upsides.
Data by YCharts
The bear case
iQiyi faces a series of issues, the first of which is competition. Although it is one of the most prominent streaming services in China, there are several players with which it will continue to fight for market share -- most notably, Tencent Video and Alibaba-owned Youku. That alone isn't reason enough to stay away from iQiyi. But it is worth noting that even Netflix, one of the world's leading video streaming services, saw its shares plunge over 40% after a loss of 0.2 million subscribers in the first quarter, in part due to competitive pressures. On the other hand, iQiyi has already reported net subscriber losses in two of the last four quarters.
Second, iQiyi also faces risks related to the regulatory environment in China. For instance, the company said last year it would soon stop producing its popular "idol competition" programs after the Chinese government began to crack down on what it views as "excessive fan culture." iQiyi is still feeling the effects of this decision as online advertising revenue fell 30% year over year in the first quarter. Management cited a "fewer number of variety shows" for contributing to the decline.
Image source: Getty Images.
Third, iQiyi rarely shows green on the bottom line, and that's an attribute investors seem to be increasingly intolerant of these days. Last year, iQiyi's net loss totaled $968.1 million, although that was slightly better than the $1.1 billion net loss reported in 2020. Management is focusing on improving margins by cutting costs (more on this later).
But it still has a lot of work to do. Like many other streaming companies, iQiyi will have to keep spending quite a bit of money producing original content. That could make it even harder for the company to deliver consistent profitability, especially in a challenging macro environment in which it faces stiff competition. The combination of these factors doesn't paint a pretty picture.
The bull case
China is the largest single market in the world by population, so it's natural to believe it could support several successful streaming services. Although iQiyi does face competitive pressures, as one of China's three leading industry players, it is well-positioned to maintain a massive audience.
That's especially the case since it is majority-owned by Baidu, one of China's largest tech companies. Baidu owned 51.5% of iQiyi's ordinary shares as of February. Its backing can help iQiyi in many ways, perhaps most notably by giving it access to the funds it needs to produce original content. Meanwhile, iQiyi's expense-cutting initiatives are seeing some results.
As Chief Financial Officer Jun Wang said in the press release announcing the company's first-quarter results: "Our gross margin consistently expanded in the last three quarters, and reached a historical high in the first quarter of 2022. Our operating expenses on the other hand decreased consistently in the last three quarters as well."
iQiyi did release new content during the quarter, too, and the outcome was a financial performance that beat analysts' estimates. Revenue of $1.1 billion was down 9% compared to the year-ago period. Net income of $26.7 million was also up from a net loss of $188 million in the year-ago period. iQiyi's top-line decline was primarily due to macroeconomic challenges outside its control, and while its subscriber count decreased year over year, it increased from the 97.0 million it reported at the end of 2021.
The verdict
In my view, it is far too early to bet on iQiyi's comeback. The company still faces too many challenges, and the difficult economic environment may hamper its efforts to get back on the right track. And although the company has made an effort to decrease costs, it won't be consistently profitable anytime soon.
True, many of the problems iQiyi faces -- such as the complex regulatory environment -- also affect other Chinese tech companies. But that only means investors should exercise a heightened level of caution when considering China-based tech stocks. Thankfully, there are far better companies in the tech industry to consider buying. That seems like a better option than waiting on iQiyi to turn its uncertain fortunes around.
