When iQiyi (NASDAQ: IQ) had its market debut in March after being spun off from Chinese search-engine giant Baidu (NASDAQ: BIDU), the stock stumbled out of the gate. It lost roughly 14% of its value on the first day of trading and briefly derailed some of the excitement surrounding the new streaming and multimedia offshoot. That didn’t last too long, however.
Strong quarterly results in April and a string of encouraging announcements have propelled rapid gains in its share price. Even with recent sell-offs stemming from concerns over a potential trade war between the U.S. and China, the stock has climbed roughly 85% from its $18 initial public offering — and more than 110% from the closing price on the day of its market debut.
As you might expect, there’s now no shortage of excitement surrounding the stock. The big gains themselves have been a part of the explosion of interest, but it’s also worth looking at some of the underlying elements that have people talking.
The Netflix of China?
Although management doesn’t appear eager to encourage the comparison, iQiyi has sometimes been called the “Netflix of China.” Given Netflix’s incredible stock performance over the last decade and the tremendous growth potential in China, that’s a moniker that has naturally attracted investor attention. CEO Yu Gong recently stated that rather than emulating Netflix’s model, his goal is to build a business that’s more comparable to Disney. That means becoming a content powerhouse for the Chinese market and exploring merchandising, video games, and other licensing opportunities.
Whether iQiyi embraces the Netflix comparisons or not, there are still plenty of reasons to be excited about the company’s opportunities in the online-video space. China is already the world’s largest streaming market, and somewhere around 40% of the country’s population has yet to connect to the internet.
The company claims about 420 million users across its platforms, and looks to have big expansion potential as it reaches new viewers and builds its paying-user base. Research firm IHS Markit estimates that the value of the Chinese streaming video market will have grown from roughly $3.5 billion in 2015 to $15.2 billion in 2020, and iQiyi looks to have significant growth potential in other multimedia markets.
Strong quarterly results and guidance
The company’s first-quarter report, published on April 26, showed 57% year-over-year sales growth. Operating income fell 22% year over year, but much of that slide is attributable to iQiyi ramping up its content and marketing spending. The company also issued guidance for sales growth between 42% and 48% in the current quarter — an indication that its growth engine is running at a high level and that shareholders can continue to look for strong double-digit sales growth.
In addition to its relationship with Baidu, which has marketing and data advantages, iQiyi has also been building partnerships with other companies in the tech and content spaces. On April 27, iQiyi announced that it had formed a partnership with Chinese e-commerce company JD.com that allows new members to sign up for a one-year subscription to either service and receive a one-year subscription to the other at no extra cost. Soon after, the streaming company said that the cross-promotion had resulted in more than a million new members for its paying-user rolls in just the first week. It’s reasonable to expect that the deal will continue to boost paid membership.
And iQiyi recently announced that it’s partnering with rivals Tencent Holdings and Alibaba in content purchasing initiatives to keep down the costs of adding new shows and films across their respective platforms.
Building a content empire
If content is king, as the saying goes, iQiyi has made some significant progress in building its kingdom in streaming and multimedia.
On May 8, the company said that it had reached a three-year deal with FilmNation (an independent American film studio known for recent hits like The Big Sick and Arrival) for exclusive distribution rights to its films over the next three years. That development added to the company’s already impressive list of content deals with companies including Netflix, Sony, and Time Warner.
iQiyi’s own film production efforts also appear to be progressing favorably. The company’s internally produced film Blue Amber has been nominated for two awards at the Shanghai International Film Festival — a sign that it can produce prestige content, which can benefit its brand and help attract top production talent. Its short film Taming the Rabbit was also nominated for an award. The company has even started opening brick-and-mortar theaters that will show its content — a welcome development as total ticket sales in China climbed 13% last year and still have substantial room for growth.
There’s been plenty of news for iQiyi on the television front as well. The company announced on June 13 that its show Hot Blood Dance Crew had broken online-streaming advertising records, with the season finale recording 1.8 billion views and attracting eight brand partners. Hot Blood Dance Crew also registered strong viewership in Malaysia, indicating progress on exporting content outside its domestic market. And iQiyi has licensed the show for distribution in North and South American markets.
Most recently, iQiyi said that it had secured exclusive online-streaming rights to the Professional Golf Association’s major tournaments. That added to the company’s existing lineup of golf content that included the Masters, the British Open, and the PGA Championship tournaments and makes the platform China’s go-to source for streamed professional golf coverage.
iQiyi is also making progress on fighting piracy and protecting the value of its content. The company announced on May 9 that its digital rights management (DRM) system was the first of its class to be approved by ChinaDRMLab, a subdivision of the state-sponsored Academy of Broadcasting Science.
Artificial intelligence, VR, and short-form video
Among entertainment companies, iQiyi looks to be leading the charge when it comes to integrating potentially transformative technologies into its business. It already uses an artificial intelligence (AI) system to assist in casting its productions, by having it estimate which actors and actresses are most likely to delight audiences for a given television program or film project.
And its partnership with Baidu offers a wide range of potential marketing opportunities. Baidu’s access to a trove of data and its world-leading position in AI suggest that casting assistance, content targeting, and other machine-learning-backed applications could become a significant long-term advantage.
iQiyi is even a player in the tech hardware space. The company has already launched two lines of virtual reality (VR) headsets and is producing film, television, and video game content for VR. Although VR has been slow to take off so far, if and when it does, iQiyi is positioned to be a winner. CEO Yu Gong has also announced plans for a short-form video platform, saying it could be ready within one to three years.
So far, it’s been a perfect storm
It seems like iQiyi has had a new partnership, growth opportunity, or content win to announce every few days since its April earnings release. With a stream of good news and the rapid growth of the Chinese streaming space, there’s no shortage of reasons why the stock has been attracting so much interest.
As evidenced by recent trade-war-related share-price declines, investors should proceed with the understanding that there might be significant bumps in the road. But for now, iQiyi looks well positioned to continue shaping and benefiting from the growth of streaming video and multimedia.
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Keith Noonan owns shares of iQiyi and Walt Disney. The Motley Fool owns shares of and recommends Baidu, JD.com, Netflix, Tencent Holdings, and Walt Disney. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.