iQIYI: A Lack Of Surprises
Contributor since 2012 / 12081 Followers
Summary:
- iQIYI, Inc.’s Q2 2024 results met the market’s expectations, as the company’s top line and bottom line were pretty close to the respective consensus forecasts.
- The company is expected to report negative revenue growth and operating margin contraction in Q3 2024, similar to how it performed for the second quarter.
- A lack of surprises relating to iQIYI’s actual second-quarter performance and the company’s Q3 financial outlook implies that a Hold rating for the stock is justified.
Robert Way
iQIYI, Inc. (NASDAQ:IQ) shares are still rated as a Hold. The company’s Q2 headline numbers were in line with the consensus estimates. Looking forward, I don’t expect iQIYI’s third quarter results to throw up any significant surprises. As such, it is reasonable that I retain a Neutral view for IQ.
My prior update, written on June 4, 2024, looked at the company’s full-year fiscal 2024 prospects. IQ’s actual second quarter results and expected Q3 performance are in the spotlight for the current article.
Q2 Performance Was Consistent With What Market Had Anticipated
The company’s key Q2 2024 financial metrics revealed in its earnings announcement released last week were aligned with the sell-side analysts’ prior expectations.
IQ’s actual Q2 2024 revenue of RMB 7,438.8 million was marginally or +0.3% above the market’s consensus top-line projection of RMB 7,415.9 million. Its non-GAAP adjusted earnings per share or EPS of RMB 0.25 for the second quarter was the same as what the sell side had predicted previously. I obtained the consensus financial estimates for iQIYI from S&P Capital IQ.
The top line (in RMB terms) for iQIYI contracted by -4.7% YoY in Q2 2024, which is similar to the -5.0% YoY revenue decline that the company suffered for Q1 2024.
Competitive pressures have continued to weigh on IQ’s most recent quarterly top-line performance. In my previous June 4, 2024, article, I cautioned that iQIYI’s “long-form video streaming business is facing competition from short-form video competitors.” At its Q2 earnings briefing, IQ noted the competition posed by “other forms of entertainment” like “short-form video.” The company also highlighted the “competition within the long-form video sector” at the recent quarterly analyst call, with the acknowledgement that “certain titles did not meet our high expectations.”
IQ’s normalized EPS declined by -59.0% YoY for the second quarter of this year, which was in line with expectations as mentioned above. The company’s actual Q2 2024 operating margin was 4.6%, which was lower than its actual Q1 2024 and Q2 2023 operating margins of 11.9% and 7.8%, respectively.
The company managed its costs pretty well for the recent quarter, as its aggregate operating expenses declined by -1.3% YoY to RMB 7,096.7 million in Q2 2024. IQ’s operating profit decreased by -RMB 268.3 million YoY in the second quarter of 2024, which is not that far from the -RMB 363.5 million YoY revenue decline in the latest quarter. As such, iQIYI’s actual Q2 2024 bottom-line performance would have been even worse and missed the analysts’ expectations, if it hadn’t maintained a tight grip on expenses.
To sum things up, iQIYI’s recent second quarter results were poor, but this was something that the market had already expected.
A Turnaround Is Unlikely To Happen In Third Quarter
IQ is expected to announce the company’s Q3 2024 financial results in late November this year, judging by its past results release dates. I believe that there won’t be any positive surprises emerging from iQIYI’s next quarterly financial disclosure.
The company revealed at its latest analyst briefing that it “experienced some fluctuation in our drama market share” for the second quarter, but it stressed that it took back “the leading spot” in July. At the Q2 earnings call, iQIYI also explained that there are “fluctuations” in its membership numbers resulting from “members who are attracted by new and popular content.”
There are two factors to consider here.
Firstly, time is needed for the changes in IQ’s share of drama viewership to be reflected in the company’s revenue. A popular drama might not immediately translate into new member sign-ups, and there are typically free one-month trials for new subscriptions. Therefore, IQ’s Q3 top-line performance could be largely influenced by the “fluctuation in our drama market share” for Q2, rather than the company’s return to the top position in drama viewership for July or the early part of Q3.
Secondly, there is no assurance that iQIYI’s drama viewership lead can be sustained in August and September. Chinese consumers seem to have no issues switching among streaming video service providers depending on new hit shows, as per iQIYI’s observation regarding “members who are attracted by new and popular content.”
This explains why the sell-side analysts are projecting a more severe top-line contraction (in local currency terms) of -9.0% YoY for IQ in Q3 2024. (source: S&P Capital IQ data).
Regarding future profitability, my opinion is that iQIYI won’t step up cost-cutting efforts or raise subscription pricing in the short term. Based on consensus data taken from S&P Capital IQ, the market is forecasting that IQ’s operating margin will contract from 4.6% in Q2 2024 to 2.8% for the third quarter.
IQ mentioned at the company’s Q2 2024 earnings briefing that its “focus will be on expanding the scale of our membership” in “the near future” which is in contrast with the “ultimate goal” to “maximize membership revenue” for the long run.
A review of iQIYI’s management comments suggests that the company will continue to invest in initiatives to expand its membership base in the short term, if it comes at the expense of lower revenue and profits. An example will be the potential discounting of IQ’s membership subscription pricing to entice new members, which might be negative for its top line and earnings. Furthermore, the company is unlikely to reduce marketing efforts in a big way, with membership base expansion remaining a priority.
Final Thoughts
iQIYI, Inc. shares are reasonably valued and there is an absence of near-term catalysts pertaining to a potential improvement in financial performance.
IQ’s forward P/E and projected bottom-line expansion rate are both at the high-single digit range, and this supports my view that iQIYI is trading at a fair valuation. Specifically, the stock’s consensus current fiscal year normalized P/E multiple and consensus FY 2023-2026 normalized EPS CAGR estimate are 9.6 times and +7.4%, respectively according to S&P Capital IQ data.
Regarding the company’s outlook, IQ is unlikely to witness a meaningful turnaround in its financial performance for Q3 2024 as explained in the previous section.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Asia Value & Moat Stocks is a research service for value investors seeking Asia-listed stocks with a huge gap between price and intrinsic value, leaning towards deep value balance sheet bargains (i.e. buying assets at a discount e.g. net cash stocks, net-nets, low P/B stocks, sum-of-the-parts discounts) and wide moat stocks (i.e. buying earnings power at a discount in great companies like “Magic Formula” stocks, high-quality businesses, hidden champions and wide moat compounders). Sign up here to get started today!