Iqiyi: Initiating With $5.20 Valuation; Growth Is Long-Term Challenge Despite Encouraging Signs

We are initiating Iqiyi IQ with a fair value estimate of $5.20. The modest upside reflects our view that customer growth has been a historical challenge despite recent encouraging signs of profitability. Efforts to bolster its content library, both in quantity and quality, have shown briefs signs of success, but have not translated to longer-term growth. Membership growth has remained stagnant, fluctuating between 100 million and 112 million from second-quarter 2019 to end-2022, despite incurring heavy losses from elevated spending on content in the attempt to provide a vast content library on its platform. However, this has not resulted in customer growth, and Iqiyi recently shifted to providing less but higher-quality content for its platform.

As Iqiyi recently focused on improving the quality of its content, the platform’s membership increased to 128 million in first-quarter 2023, but it declined to 111 million in the next, reflecting the unviability of Iqiyi’s efforts to differentiate itself from content on other platforms. We believe this is the biggest concern for Iqiyi as growth appears to remain a challenge despite a shift to reduce costs and self-produce content.

However, we are encouraged with Iqiyi’s decision to self-produce the majority of its content, thereby reducing content costs to about 50% of sales compared to the 60%-80% level in 2018-21 when it incurred massive losses. This has turned around Iqiyi’s profitability, generating high-single-digit operating margins since 2022, which is an improvement from years of 10%-30% operating loss margins from 2018 to 2021. Concerns remain whether profitability can be sustainable if competition intensifies, not only with streaming platforms, but also against short-video and livestreaming mediums. Our valuation currently assumes that Iqiyi is able to maintain current margin levels under our modest growth assumptions, but we could lower our long-term outlook if there are more profitability or growth headwinds.