3 Reasons To Buy Iqiyi – The 'Netflix Of China' – According To Jefferies

Streaming video provider Iqiyi Inc IQ, dubbed by some as being the "Netflix, Inc. NFLX of China," offers investors a potential upside of nearly 30 percent, according to Jefferies.

The Analyst

Jefferies' Karen Chan initiated coverage of Iqiyi with a Buy rating and $33 price target.

The Thesis

The bullish case for Iqiyi is based on three factors, Chan said in the initiation note. (See her track record here.)

They are:

• The online video space in China remains undermonetized, which is positive for a company that holds a leadership position with 565 million mobile monthly active users (67 million paying users) and the highest time spent share at 42 percent, the analyst said. Looking forward to the end of 2018, the total subscriber base should expand to 84 million users; 20 percent of online Chinese video users by 2020; and ultimately penetrate 40 percent of the mobile MAU base, she said.
• Original content for the Chinese audience continues to improve, and the streaming video trend as a whole is shifting away from quantity to quality, Chan said. This should benefit Iqiyi, which has a proven track record of original content, including 2018's "Story of the Yanxi Palace."
• Content cost as a percentage of sales is likely to peak in fiscal 2018 at 87 percent and gravitate toward a 50-60-percent range over the long term, Chan said. The company will benefit from improved monetization of users and an increasing mix of original content that costs less to air per episode, she said.

Jefferies' $33 price target is based on 4.6 times 2019 P/S, which implies a 45-percent discount to Netflix's consensus estimates.

Price Action

Shares of iQiyi were up 1.7 percent at $25.92 at the time of publication Monday. 

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