iQiyi Inc (IQ), the popular video streaming site in China, has gone public on the NASDAQ stock exchange last week.
Source: Screenshot of iQi yi website
iQiyi can be seen as a mixed of Youtube and Netflix. There are tons of free content for you to view but if you want to gain access to higher quality and mainstream shows and movies, you could join as a subscribing member. Unlike Netflix though, iQiyi allow users to buy individual shows or movie if they are just planning to watch it a one-off.
Subscription ranges around RMB178 to RMB249 a year (RMB 15 to RMB 21 per month) for different tier subscription. Typically, you will be able to get access to more shows, no advertising, HD videos, faster streaming speed and even some bonus events and games that they organized. By comparison, Netflix subscription typically cost around USD11 to USD15 a month based on the package.
Source: Screenshot of iQiyi subscription page
Is this new spinoff from Baidu Inc (BIDU) worth looking at?
iQiyi Inc raised about US$2.25 billion last week through the IPO at a price of US$18 per ADR (American Depository Receipt). This gave the company a market valuation of around US$13 billion, making it the biggest deal on NASDAQ since Alibaba.
The company is one of the typical fast-growing tech companies that we keep seeing in the stock market. Its revenue is growing extremely fast from RMB 5.32 billion in 2015 to RMB17.3 billion in 2017. That is a compounded growth of 80% since 2015. iQiyi is actually a large division in Baidu, contributing about 20% of the group’s revenue.
However, it is also still in loss-making mode. It recorded a net loss of more than RMB3.7 billion in 2017, worsening from RMB3.06 billion a year ago. According to the CFO during an interview with CNBC, iQiyi is still expecting a loss in 2018 but hopefully, they will be able to turn a profit by the year 2019.
How does iQiyi make $$?
According to its prospectus, iQiyi basically obtains its revenue in three major ways. 46.9% of its revenue or RMB8.16 billion is through online advertising. These are mainly from the ads display before a video and also banner advertising when the user is using the website or the mobile app. In a way, this can be seen as the Free-to-view TV business model, where iQiyi does not charge any fees for its content but earns from showing advertisements to the viewers.
This is also the main method of how iQiyi is acquiring its new users. China does not have a culture of cable television, this means that generally, there has not been a culture of paying for video content.
Thus, by providing free content through its main site and mobile app, iQiyi get its new user to try out its platform before promoting its subscription to them. Subscription is then their second stream of revenue. In 2017, 37.6% of its revenue, or RMB6.54 billion is coming from subscription fee. At the moment, the company has more than 50.8 million subscribing members, up from just 30million a year ago. Thus, this is the fastest-growing segment of iQiyi.
Lastly, iQiyi is now one of the largest original content producers in China, producing many blockbuster films and shows over the years. It also distributes these content through other third-party channels or websites. Content distribution makes up about 6.9% of its revenue.
On top of that, it has a segment of revenue still deemed as “others” in its prospectus; this includes distributing online games, live broadcasting and also other merchandise sales through their IP. All these contribute about 8.6% to its overall revenue.
Is iQiyi worth betting on?
iQiyi is definitively providing a value-added service for its customers, both in term of its free and paid content. The internet, either through desktop, mobile or Smart TV would continue to be the major platform viewers are getting their content. With the new injection of cash, iQiyi does have the runway to continue its operation for another 1-2 years, even if it remains unprofitable.
However, iQiyi is competing in an extremely tough market. Two of its key competitors, Youku and QQ Video, is backed by two of the largest technology companies in China; Alibaba and Tencent Holdings respectively.
To me, it seems that the key reason why Baidu is choosing to list iQiyi at this moment is due to the fact that Baidu has much fewer resources compared to both Alibaba and Tencent. And if the video war continues to prolong in the digital space in China, iQiyi could still need to be burning cash for a while.
Given that both Alibaba and Tencent Holdings have almost a huge war chest to continue burning, Baidu would need the support of the public market to compete directly with the two giants.
Yet, this might not be a winner-takes-all game. Similar to how the consolidation plays out between Uber, Didi, and Kuaidi in the ride-hailing industry, we might also see some consolidation in the video streaming platforms in China over the next few years. As these video platforms consolidate, they might have an easier chance of reaching profitability and everyone could just end up having a portion of the pie in the video streaming world. We have already seen the consolidation of Youku and Tuduo before Alibaba took the combined company private.
Therefore, iQiyi could potentially be a winner in this space, either through taking over other players or being merged into its competitors. But, it is considered as a relatively higher risk stock and definitively not for everyone.
However, if you are still optimistic about this space, you could also directly invest in the parent companies; Baidu Inc., Alibaba Inc or Tencent Holdings, which I would consider as slightly lower risk investments.
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Stanley owns shares in Tencent Holdings, Alibaba Inc and Baidu Inc.