When iQiyi (NASDAQ:IQ) announced its third-quarter results, IQ stock surged higher on strong subscriber growth, climbing from $17.5 to $20.
But the momentum has failed to continue, and iQiyi stock fell back to $18.5 in a few trading sessions. I believe that IQ stock is likely to remain subdued because its business faces multiple challenges.
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One of the biggest challenges for IQ, like most Chinese streaming companies, is increasing its average revenue per user.
The number of streaming video-on-demand subscribers in China is estimated to be 305 million. In the United States, the number of subscribers is estimated to be 158 million.
However, total subscription revenue in the U.S. is likely to be about $20.4 billion, versus $8.9 billion in China. That works out to monthly revenue per user of $10.76 in the U.S., compared to $2.43 in China. Clearly, subscriber monetization in China is inadequate.
Further, IQ reported total subscribers of 105.8 million in Q3, 99.2% of whom were paying subscribers. Its Q3 membership revenue was $520 million, so its average monthly revenue per subscriber was around $1.65.
Supporting my conclusions, Ampere Analysis stated: “Specifically, one of China’s big three online video platforms, iQiYi, has an average discount rate of 33% with an ARPU of just $1.80 compared to a monthly cost net of tax of $2.80.”
IQ’s subscriber growth is certainly positive, and I expect its strong growth to continue. However, IQ might need to increase its subscription revenue at some point.
IQ’s Cash Burn Will Continue
IQ’s subscriber growth comes at a meaningful cost. Specifically, IQ has to bankroll the creation of new content to keep existing subscribers engaged and to attract new subscribers.
In Q3, IQ’s revenue from its members was $520 million and its content costs came in at $870 million. Its content cost per paid subscriber per month was $2.76, versus its average monthly revenue per user of $1.65. Therefore, there is a clear, negative gap between its membership revenue and its content cost.
As long as that gap fails to narrow meaningfully, iQiyi will continue to burn cash. It is worth noting that, in Q3, the company’s operating-level loss increased to RMB2.8 billion, compared to RMB2.6 billion in the same period a year earlier.
IQ does have RMB4.5 billion of cash and RMB6.8 billion of short-term investments. So it can afford to burn cash. However, its lack of profitability will certainly be reflected by IQ stock.
IQ will soon invest more in content than China’s top broadcasters. Furthermore, the growth of its content investments will not decelerate because it faces competition from Tencent (OTC:TCEHY) Video and Youku. Competition will prevent IQ from meaningfully increasing its fees.
Expansion Beyond China
One of the growth strategies for iQiyi is expansion beyond China. The company is looking at moving into Southeastern Asia countries, including Malaysia, Indonesia and Thailand.
But Tencent Video already has a presence in all of those nations. Therefore,IQ will have to charge competitive membership fees in the countries. As a result, expanding to those countries probably won’t slow its cash burn.
iQiyi also plans to distribute content to North America, Singapore, South Korea and Japan. But for now, it appears to be focusing on Southeast Asia.
Concluding Thoughts on IQ Stock
IQ has enough cash to survive for years. However, investors want to see the company develop a strategy to boost its ARPU. If the company fails on that front, IQ stock is unlikely to rally much.
It is worth noting that, despite its volatility, iQiyi stock is largely at the same level as it was last year. Given the company’s challenges, IQ stock will likely remain rangebound for an extended period.
