iQiyi Stock Is No Longer a Broken IPO

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It took nine trading days, but iQiyi (NASDAQ: IQ) finally broke above its IPO price. Wednesday's close of $18.07 is a noteworthy milestone. It's the first time that the leading Chinese video streaming site isn't a broken IPO at the end of a trading day.

Under most scenarios, iQiyi would've been a hot number out of the gate two weeks ago. The dot-com darling is growing quickly, and it's in the right place at the right time. Streaming video is gaining momentum at the expense of traditional television viewership, and iQiyi is China's top dog in terms of user time spent on the platform and last year's monthly active user counts.

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The market had other plans -- iQiyi went public at $18, and within minutes of its debut it was trading below that mark. It remained that way until the last few minutes of Wednesday's trading day.

The fall and rise of iQiyi

There are a few reasons why iQiyi stumbled as a debutante. Chinese growth stocks were already falling out of favor before whiffs of a trade war made things worse in the eyes of stateside investors. Also, iQiyi is in the red when it comes to profitability, and those deficits are widening. China's government has also been known to clamp down on other forms of digital content when it believes that it's a bad influence on the country's youth.

Finally there were the constant comparisons to Netflix (NASDAQ: NFLX) in the buzz leading up to the IPO, but the market eventually concluded that iQiyi is not the Netflix of China. Netflix has been the best performer on the S&P 500 over the past five years, so it's easy to see why bulls would want to cling to the "next Netflix" tag, but iQiyi doesn't dominate the streaming market in China the way that Netflix does in the U.S. There are a couple of rivals nipping at iQyi's heels. Other Chinese streaming video companies that had gone public on stateside exchanges years earlier -- Youku and Tudou -- weren't big winners before being acquired. Netflix is also a pay service, whereas 88% of iQiyi users lean on it as a free ad-supported platform.

If that all seems like a pretty bleak scenario, let's now get into why iQiyi deserves to be back above $18. Wall Street loves growth, and that's iQiyi. Revenue more than doubled in 2016, slowing to a still beefy 55% uptick last year. You have to go all the way back to 2004 to find the last time that Netflix was growing faster than that.

It's also certainly true that iQiyi is a streaming platform consumed mostly by ad-tolerating freeloaders, but premium subscriptions are on a tear. The number of folks paying iQiyi for exclusive and ad-free streams has grown nearly fivefold in two years, from 10.7 million in 2015 to 50.8 million in 2017. If conversions continue at that brisk pace, iQiyi may have more paying members than Netflix in a few years, though naturally they're paying less per head at this point.

So iQiyi deserves better than what the market thought it was worth over the past two weeks. It will have to earn the market's respect as it registers a few quarters of growth and converting free users to paying subscribers. It will be volatile, but after nine trading days, the stock is back where it belongs.

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Rick Munarriz owns shares of Netflix. The Motley Fool owns shares of and recommends Netflix. The Motley Fool has a disclosure policy.