iQIYI Q3: Nothing Impressive, But Short-Form Content Looks Promising
Contributor since 2023 / 2763 Followers
Summary:
- I am downgrading iQIYI Inc. stock to a hold rating due to mixed Q3 results and the need for progress in attracting short-attention span viewers.
- Q3 revenues fell 10% y/y to $1B, missing estimates by $20m, while non-GAAP EPADS beat estimates by 2 cents at $0.07.
- The company’s financial position is risky with $595m in cash and $1.2B in long-term debt, and operational performance is subpar.
- iQIYI’s focus on micro-dramas could improve margins and attract viewers, but execution must be perfect to capitalize on this growing trend.
FernandoPodolski/iStock via Getty Images
Introduction
iQIYI, Inc. (NASDAQ:IQ) recently reported mixed Q3 results, in my opinion. Thus, I wanted to look at the numbers in more detail and give some comments on the outlook for the company and what could be a promising development that could turn the company’s luck around. I am downgrading to a hold rating until I see some good progress in attracting short-attention span viewers to its new micro-drama offerings, which should be a decent revenue generator if it can execute the plans.
Q3 Results
Revenues came in at $1B, -10% y/y, and missed estimates by $20m. Q3 non-GAAP EPADS came in at $0.07, which beat analysts’ estimates by 2 cents.
Digging a little deeper into the breakdown of revenues, membership services revenue came in at $622.1m. This was -13% y/y because of a lighter content slate. Advertising revenues were $190.5m, -20% y/y, due to the decrease in brand advertising. Other revenues were $103.8m, -8% y/y, while a saving grace to soften the blow was that content distribution came in at $116m, an increase of 52% y/y, driven by the increase in barter transactions.
Looking at the company’s profitability and efficiency metrics, operating income came in at $34m, which brings its operating margin to around 3% compared to 9% last year. Non-GAAP operating income was $52.5m, with a margin of 5% vs. 11% last year.
Regarding the company’s financial position, the company currently has around $595m in cash and equivalents against $1.2B in long-term debt. This position is a bit risky, in my opinion. The company’s operational performance is subpar. IQ’s operating income doesn’t cover the interest expense on long-term debt, so if it continues to underperform, that debt pile may become a decent risk. However, since the company does have almost $600m in cash and equivalents, it shouldn’t be an issue for now.
In summary, the results were mixed and more towards the bad end than good, in my view. The company is struggling to generate positive revenue growth and has lost quite a bit of profitability compared to last year. The macro headwinds are not doing any favors for the company and pose a real challenge right now, which may be out of the company’s hands.
Comments on the Outlook
The company has a lot of competition, which has been taking market share away from IQ for a while now. The rise of short-form video content through the likes of Vine, and now TikTok and other platforms that offer such a feature, is much easier to digest without committing too much time and effort in general. In my opinion, the company needs to adjust quickly to the ever-changing viewer, who seems to have a much shorter attention span, which may not be a negative. These generations are adept at multitasking and quickly processing information.
While long-form content is not going to go away any time soon, it is much harder to make such content profitably. Netflix (NFLX), being the pioneer, found a way to become very profitable over many years of improvements. It didn’t have as much competition before, which made it a little easier. For IQ, the company is up against so many alternatives in China, and as I mentioned, a short attention span means the content needs to be adjusted accordingly. Micro-dramas are one avenue that seems to be growing quite fast in popularity in China. Viewers binged on these micro-dramas that aren’t going to win any awards. They focus on tried-and-true ways to keep the viewer entertained through love affairs, rags-to-riches, and betrayal mini-dramas that last a few minutes and may have over 100 episodes to keep them entertained. Last year, Kuaishou said they had over 270m viewers watching micro-dramas, with over 94m paid viewers.
IQ, in the latest transcript, mentioned that the management had upgraded its iQIYI Lite App to focus on mini and short dramas with an advertising model. The main App will continue to focus on long-form content with a subscription-based model. This is a good development that tells me that the management is aware of the changing preferences of the younger generations and will not be falling far behind the competition. I think they are falling slightly behind the competition here. As I mentioned above, Kuaishou already had millions of people binging on micro-dramas back in ’23, so IQ is only getting into the trend now. It is going to take a while longer before it can reap the rewards, if at all. The micro-drama industry in China is estimated to be around $5.3B in 2023, so there is a lot of opportunity for growth in this segment if IQ can capitalize and execute on it.
With a further focus on micro-dramas, which is most likely its main revenue savior eventually, and being funded by advertising, I could see the company’s margins turning for the better. This will be once the company can properly market and produce this content to its vast audience of paid and free viewers. That remains to be seen, however.
What Am I doing with my position?
My small position is underwater right now by quite a bit; however, since it is quite a small position, I am not worried about further downside risk. I am not looking to currently add to my position, mainly because I would like to see how the new developments will do in the next quarter. I would like to see meaningful growth returning to its revenues, as well as its profitability needs to improve substantially. And I think short-form content will help it. Since it is a rather new development for the company, it needs to execute to perfection to attract viewers and advertisers and finally get out of the rut it’s been in for the last good while.
iQIYI, Inc. is currently down around 90% in the past 5 years, and if something doesn’t change operationally, the company is going to become a penny stock. Short-form content seems promising, but only time will tell if the company can deliver.
Therefore, I am downgrading the company to a hold rating and will revisit it in Q4 to see the progress.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of IQ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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