Netflix (NFLX 1.77%) and iQiyi (IQ 0.24%) are two of the world's largest streaming video platforms. Netflix ended its latest quarter with 231 million paid subscribers, but it's never launched its app in China. iQiyi, which mainly operates in China, served 101 million subscribers last quarter.
iQiyi was heralded as the "Netflix of China" when it went public in 2018. But today, it trades nearly 70% below its IPO price of $18. The bulls retreated as it lost subscribers, failed to generate any profits, and took on more debt. Netflix's stock lost about a third of its value over the past 12 months as investors fretted over its slowing growth, but it remains nearly 32,000% above its split-adjusted IPO price of $1.07 per share in 2002. Will Netflix remain a better streaming video play than iQiyi in 2023?
Image source: Getty Images.
Netflix shifts gears as its growth cools off
Netflix lost paid subscribers for the first time in more than a decade throughout the first and second quarters of 2022. It blamed that slowdown on shared passwords, competitive headwinds, Russia's invasion of Ukraine, and softer demand for its streaming services in a post-lockdown market.
To counter those headwinds, Netflix launched a cheaper ad-supported tier last November and started charging fees for shared passwords. As part of that strategic shift, co-founder Reed Hastings recently stepped down as Netflix's co-CEO to become its executive chairman. Chief operating officer Greg Peters will join Ted Sarandos as Netflix's new co-CEO.
Netflix's business isn't headed off a cliff. Its number of paid subscribers stabilized and rose sequentially over the past two quarters, and its total revenue still increased 6% to $31.6 billion in 2022. Its net income fell 12% to $4.5 billion amid tough currency headwinds, but it's still generating consistent profits as Disney, Warner Bros. Discovery, and other traditional media companies rack up steep losses on their streaming video platforms. Analysts expect Netflix's revenue and earnings to grow 7% and 6%, respectively, in 2023.
Netflix doesn't own as much first-party content as Disney, WBD, and other major studios, but it continues to lock in viewers with original shows and movies like Wednesday, Harry & Meghan, Glass Onion: A Knives Out Mystery, and Troll. That ongoing expansion should drive its long-term growth and reduce its overall dependence on licensed content.
iQiyi's future looks a lot murkier
iQiyi faces intense competition from Tencent Video and Alibaba's Youku Tudou in China's streaming video market. All three platforms are "freemium" services that provide a mix of free ad-supported content and premium ad-free content. Baidu (NASDAQ: BIDU) still owns a controlling stake in iQiyi.
iQiyi's average daily number of subscribers fell sequentially in the second quarter of 2022, but that figure bounced back in the third quarter. It continues to lose subscribers on a year-over-year basis, but it's partly offsetting that pressure by boosting its average revenues per membership.
Unfortunately, iQiyi's ad revenues, which accounted for 16% of its top line in its latest quarter, are still declining year over year amid the macroeconomic headwinds and COVID-related challenges in China. Stiff competition from ByteDance's Douyin (known as TikTok overseas) might be exacerbating that decline.
As a result, analysts expect iQiyi's revenue to drop 5% to 28.9 billion yuan ($4.3 billion) in 2022 with a net loss of 326 million yuan ($48 million). That's a big improvement from the net loss of 6.2 billion yuan ($910 million) it posted in 2021, but it still hasn't ever posted an annual profit. That's probably why Baidu is reportedly interested in divesting its stake in iQiyi.
iQiyi's balance sheet is also a mess. It ended its latest quarter with a debt-to-equity ratio of 7, compared to Netflix's latest ratio of 1.3, and it recently tried to boost its liquidity with a new secondary offering at $5.90 per American Depositary Share.
The obvious winner: Netflix
Netflix's stock isn't cheap at 30 times forward earnings and 4 times this year's sales, but it's still a much more appealing investment than iQiyi, which trades at just over 1 times its projected sales for 2023. Netflix is broadly diversified across dozens of countries, and it continues to generate stable growth and profits in a cutthroat market. Meanwhile, iQiyi is tightly shackled to the crowded Chinese market, it's losing subscribers, it's unprofitable, and it's being crushed under a mountain of debt. If even Baidu wants to sell iQiyi after all these years, then you probably shouldn't buy it as a turnaround play.
