Netflix (NFLX) is the best performing stock in the S&P 500, up an astounding 88% so far in 2018. The best performing Initial Public Offering (IPO) of this year is iQIYI (IQ), which has gained whopping 91% in the less than 3 months since closing at $15.45 on first day of trading March 31. Today’s investing advice shines a spotlight on what people are calling the Chinese Netflix.
What two have in common is streaming; Netflix is the leader everywhere except China, where it doesn’t operate. iQIYI has China, whose addressable market is almost equal to the total of nearly 200 countries where Netflix does offer its service.
Even though there is not much history to the IQ chart, you can start to see a pattern, with periods of consolidation that form bullish flags followed by bursts to highs.
The latest move was especially strong, taking shares above the $30 level. This might need some time to digest, but my investing advice is this: purchases in the $27-$28 level offer a good entry point, and will likely be rewarded in the near future.
Fundamentals for Growth
A recent announcement from iQIYI, is the debut of the new “Nadou” app. This app will specialize in the short-video craze that is becoming popular in China. The area is highly fragmented among news clips, networking, and entertainment, but management aims to have the app focused on entertainment. It also stated that it aims to be the one of the leaders within the next three years, indicating serious investment to come.
Another area for growth is IQ is expanding its platform from online-only, incorporating offline options as well. The company has opened a new physical movie theatre, known as “Yuke,” in Zhongshan, Guangdong province.
In 2018, China is poised to overtake North American (US and Canada) ticket sales, and become the largest movie market in the world. In 2017, world cinema sales reached a record $40 billion. China accounted for 19.75% ($7.9 billion) of the total. To satisfy this demand, China is reportedly constructing 25 theatres a day. On top of this, in 2017, China produced 970 movies, of which 487 were played in theatres. With an almost perfect 50/50 ratio of online-only and theatre-release films, it makes sense and is a big step forward to open theatres.
The non-conventional theatre does provide multiple revenue-stream opportunities. The company can now sell merchandise related to its original content, sell snacks and popcorn, and also generating revenue from renting rooms (there are no upfront ticket charge, rather a per-hour rent charge). This does add some complexity to the financials of the company, as now there will be a new set of margins and cost structures to look through. But the opportunity is very large.
Lastly, there’s potential investment in foreign streamer iFlix. The company is a movie streamer that models itself on NFLX platform, but focuses on emerging markets.
This is a big deal. The company does not release its raw financial/user data, but did report “tremendous growth.” As of March 2017, the company reported 5 million users on the platform from 24 countries of operation. By August, subscriber growth was reported to have increased 3x and revenue increased 230%
IQ currently has a market capitalization of $19 billion, or about one sixth of Neflix’s $160 billion market. This suggest if IQ can continue to add subscribers (it is expected to cross 100 million by the end of 2019), and have additional revenue streams from theaters, one could easily see the share price rise fivefold, or cross $150, in the same time period.
