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Is IQ a Buy Again?

By Matt McCallFeb 11, 2019

iQIYI (IQ), commonly referred to as the “Netflix of China,” has been a victim of the trade spat between China and the United States that has been going on for months. That’s interesting, though. Because the issue between the two countries has very little to do with IQ.

The leading streaming company in China provides mainly China-based content to its subscribers. So a trade disagreement with the U.S. shouldn’t have such a damaging effect on the stock.

Try telling that to the investors who are avoiding all Chinese stocks based on the headlines.

Even Chinese technology giants Alibaba (BABA) and Tencent Holdings (TCEHY) – two of the largest internet companies in the world – have been crushed over the last nine months. But now that rumors of a potential deal between the U.S. and China seem to be becoming more of a reality, things are starting to look up.

The big rally we saw in Chinese stocks to kick off 2019 shows the huge upside potential these names have once the big black cloud we call trade is removed.

Down but Not Out

iQIYI has rebounded 50% from its December low after losing two-thirds of its value during the sell-off. But it still remains well below its June all-time high of $46.23. While it may take time to regain that high status, I am confident that fresh records will be achieved in the coming years. For buyers of the stock today, that would represent a double.

The unknown of the trade spat will eventually be old news, allowing investors to once again focus on what companies actually do rather than political uncertainties.

iQIYI is the leader in video streaming in a country that is home to more than 1.3 billion people and is growing its economy by 6%. Disposable income will grow as the middle class does, leading to more and more subscribers for IQ.

Subscriber growth is a key metric for companies like iQIYI – just like it is for Netflix (NFLX) and Facebook (FB). The company is on the right track. Its premium subscriber total – those who actually pay – grew 89% over the last year to nearly 81 million people.

Also similar to NFLX when it was in its early stages of growth, IQ continues to lose money. But that’s perfectly okay. When a company is focused mainly on growth, the next most important figure is the top line. iQIYI has increased revenue 48% over the last year, which is a very impressive number.

Now on to valuation. Based on iQIYI’s current market cap of $14.5 billion and projected 2019 sales of $4.85 billion, the stock trades with a price-to-sales ratio of 2.99. Compare that to Netflix, which trades with a 2019 price-to-sales ratio of 7.43.

It is very common for a U.S.-based company to have a higher valuation than its Chinese peers. But with growth projections higher for IQ and the potential market in China wide open, trading at just 40% of NFLX’s value makes IQ a huge bargain buying opportunity for long-term investors.

So… is IQ a good buy at current prices near $20?

If you’re an investor with a lot of patience and a strong long-term outlook, then I would answer that question with a big “yes!”

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