The iQIYI Growth Story Is Priced In, Goldman Says In Downgrade

IQIYI Inc IQ, the “Netflix of China,” posted better-than-expected second quarter earnings Tuesday. Net revenue grew 51 percent year-over-year and management guided Q3 net revenue between RMB 6.70 billion and 6.98 billion, beating both Goldman Sachs and Bloomberg consensus estimates by mid-single digit percentages.

The Analyst

Goldman Sachs analyst Piyush Mubayi downgraded iQiyi from Buy to Neutral and raised the price target from $23 to $30.

The Thesis

Membership services increased 66 percent annually during the quarter, driven by 6.1 million new subscribers and a partnership with JD.Com Inc JD, Mubayi said in the downgrade note. (See the analyst's track record here.) 

The company’s total paid subscriber count now stands at just over 67 million — a tiny fraction of the huge Chinese market investors are expecting iQiyi to claim.

Further upside came from the company’s expanding content library, traffic from short-form video platform Nadou and mobile gaming revenue from recently acquired Skymoon, the analyst said. 

The iQiyi IPO was only four months ago, but the stock has since seen its shares rocket 100 percent higher. The stock’s all-time high was recorded on June 19 at $44.20, over 180 percent higher than the $15.55 it closing price on its first day of trading.

Investors have relaxed recently, leading analysts to conclude iQiyi's growth story is priced in for now.

“While we maintain our positive view on the fundamentals and growth outlook of the company, we believe the rallied market price has factored in positive upsides and we see greater upside potential elsewhere in our coverage universe,” Mubayi said.

Price Action

Shares of iQiyi were trading down more than 5 percent lower Thursday, moving around the $30 handle.

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