iQiyi IPO: What Investors Need To Know

Another Chinese company has filed to go public in the United States. Reuters reports that iQiyi Inc . “filed on Tuesday for an initial public offering that is set to raise more than $1.50 billion.” However, this initial value is merely a placeholder and the company will likely look to raise much more. iQiyi is often described as a Chinese Netflix (NASDAQ:NFLX), streaming both foreign and domestic movies and TV shows. This includes some Netflix original productions.

Investors may look at Netflix’s incredible successes over the past decade and the potential of video streaming in China and conclude that this is a slam dunk investment, but no two companies face the same circumstances. Nevertheless, there is a lot to like about this company’s potential and its relationship with other Chinese tech giants. For investors who are watching Netflix skyrocket but are worried about buying near the peak, iQiyi may prove to be an attractive alternative.

Growth and Potential
iQiyi was first founded in 2010, but it is only in the past few years that it has turned into China’s premier video streaming service. According to its SEC report , the number of subscribing members has climbed from 10.7 million in 2015 to 50.8 million by the end of 2017. Revenue has risen accordingly, going from 5.3 billion RMB in 2015 to 17.4 billion RMB ($2.7 billion) in 2017.

Some investors may be worried about iQiyi’s rising losses, as those have risen from 2.5 billion RMB to 3.7 billion RMB ($574 million). But the example of Netflix should be proof that video streaming services like iQiyi can thrive for years despite being unprofitable on the back of constant growth.

And there is huge growth potential in China in terms of subscribers. The South China Morning Post reported that the total online video paying subscriber base is estimated to reach 140 million by 2020 compared to 74 million in October 2017. The Chinese are willing to pay for quality content, and will have more money to do so as they steadily catch up with the West.

But while there will be more subscribers than before, iQiyi will not be moving towards a subscriber-based model. Unlike Netflix, iQiyi gets the majority of its revenue through advertising. iQiyi states that membership revenue as a percentage of total revenue have risen from 18.7 percent in 2015 to 37.6 percent in 2017, but admits that “For the foreseeable future, we expect membership services as a percentage of total revenues to remain at a similar level as that in 2017.” However, this is not a bad thing as it offers iQiyi more avenues to diversify its revenue.

The Baidu Relationship
In addition to the potential of the Chinese video streaming industry, iQiyi’s losses should not be a major concern because it has strong backing from other Chinese tech giants. Baidu owns 80 percent of iQiyi, while Xiaomi invested $300 million in iQiyi in 2014. This IPO is thus a decision by Baidu to spin off iQiyi while it focuses on its core business.

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Baidu has propped up iQiyi in the past both financially and by letting iQiyi use Baidu’s artificial intelligence platform to better help match subscribers to videos. In fact, iQiyi’s main video streaming competitors are also backed up by other tech companies. Tencent Video is part of Tencent and distant competitor Youku Tudou is owned by Alibaba (NYSE:BABA).

Tencent Video is by far iQiyi’s main competitor. It is closely connected with the Chinese social media giant WeChat which has nearly 1 billion monthly actives users, and Tencent has the pocketbooks to nullify the financial advantages of iQiyi’s relationship with Baidu. While continued growth in the Chinese video subscriber industry, similar to a hosted PBX service, does mean that both companies can thrive, the problem is that both companies will have to continually spend more to produce quality content to attract customers.

iQiyi appears to be aware of this problem, as it states in its SEC report that it plans to use the raised funds to primarily enhance its brand recognition and attract talented employees. While it is impossible to say whether Tencent or iQiyi will prevail in the long run, what is clear is that for now both companies have the potential to grow a great deal. The prospect of competition should not severely harm iQiyi’s prospects for now.

Show Great Interest
More details about this IPO needs to come out to reach a firm conclusion, but what is clear is that iQiyi could be undervalued compared to a hot stock like Netflix. iQiyi will be only worth a fraction of Netflix despite already possessing nearly half as many paid subscribers. The Chinese video streaming market is expected to grow more as a wealthier Chinese populace subscribes to videos, and iQiyi has a firm backer who will help them stay technologically relevant. Investors should have reason to be concerned about iQiyi’s profitability numbers and intense competition, but that should not take away from its potential upside.

Written By: Alex Newman