What happened
iQiyi (IQ -2.62%) trounced the market this week. The Chinese entertainment stock gained 12% through Thursday trading compared to a 2% drop in the S&P 500, according to data provided by S&P Global Market Intelligence. The move helped push returns above the market's, with the stock at a 1% decline so far in 2022 compared to a 16% drop in the S&P 500.
The rally came as investors became more optimistic about iQiyi's growth and earnings potential.
So what
iQiyi said in late May that it is still losing subscribers on its platform. The 4% drop in that core growth metric contributed to 9% lower sales, year over year. The streaming content business is being pressured by slowing advertising spending, rising competition, and a weakening economic environment.
Yet more investors are finding reasons to like the stock following its 65% collapse since mid-2021. iQiyi stock received several upgrades from investment firms in the days following its May 26 earnings update.
Investors are especially excited about the potential for higher profitability now that the company is more focused on efficiency rather than on flooding the market with a variety of TV, movie, and audio content. Its gross profit margin hit a new high this past quarter.
Now what
iQiyi has a long way to go before it can win its way back into investors' good graces. It's not clear yet whether the company will return to steady subscriber growth, especially now that it is releasing fewer TV shows and movies. That slower launch schedule is boosting the bottom line today, but that's not much help if the platform continues shedding viewers.
Investors will also want to watch for signs of a strengthening digital advertising industry in China, since ads deliver a large part of iQiyi's annual revenue. Stabilization there, and in its membership trends, would imply much quicker earnings growth now that the company has reduced its expense burden.
But so far iQiyi is delivering only a piece of that bullish investing thesis, and so investors might want to look at other growth stocks.
