THE WAY BACK: CHINESE MEDIA GIANT iQIYI (IQ) LIVES TO STREAM AGAIN
Photo by Valentin Petkov on Unsplash
A year after inflating earnings, recent filings indicate a viable business remains.
If “a thief has more than two hands,” as the Chinese proverb says, then what those hands do after getting caught red-handed, is indicative of future thievery. So it was last week for beleaguered Beijing-based video streaming giant iQIYI after it issued its 2020 Annual Report. The document was the company’s first significant regulatory filing after respected short-seller Wolfpack Research issued a damning report on the company back in April.
“We estimate IQ inflated its 2019 revenue by approximately RMB 8-13 billion, or 27%-44%,” said the report.
As would be expected, shares of both iQIYI and parent Baidu tumbled. The SEC stepped in and investigated. Investors sued en masse. The firm floated $800 million in convertible debt to shore up its balance sheet. It brought in outside auditors. iQIYI, along with other dubious Asian companies, became the basis for a U.S. Senate bill demanding more fiscal transparency from foreign firms.
With the immediate carnage settled, iQIYI began down the long road back to fiscal sobriety: The firm estimates it will face something like RMB1.2 billion in losses from over 1,500 legal actions against it. Its financial reporting is more modest and exact. Its once robust 2019 operating cash flows, of RMB3.9 billion, became a numbing 2020 loss of RMB5.9 billion. And its annual report is full of the surprisingly frank list of forward-looking risks: Government meddling will be aggressive. China’s legal system will be unstable and uncertain. iQIYI’s relationship, with its partners like Baidu, will be confusing and uncertain. There will be major losses going forward. And brutal competition working backwards.
Doing business in China really is “an opportunity riding the dangerous wind.”
But conversations about iQIYI’s recent filings indicate that these risks may not matter: The company is showing the bones of a viable, if troubled, Web-scale streaming media operation, with a long-term future.
iQIYI claims 101 million paying subscribers. Excluding memberships, subscribers was exactly broken down as 100.7 million. That’s more than Disney+. In 2020, iQIYI’s total mobile monthly average uses, both paid and unpaid, was 479.8 million. That’s 120 million more than Twitter’s users. Average mobile daily active users were 115.6 million. That’s about the same scale of iPhone users in the United States. This swath of humanity spent, on average, 8.4 billion hours a month watching, playing, and reacting a full range of games, movies, and other interactive storytelling.
Image Courtesy of Viki.com
More importantly, to our eyes anyway, iQIYI makes good movies; mostly action, fantasy, and animation, but we found Ping Pong, Girl Like Me and FourTry to be a refreshing cultural perspective and a much-needed break from America’s worn narratives of socio-upheaval. This production capacity is expanding: Reports are iQIYI recently opened a regional office in Singapore. More are to come.
Institutional managers are taking notice. Large-fund ownership jumped from roughly 55% last year to roughly 80% for this stock. And the Chinese government continues to signal that it is taking piracy seriously. Authorities shuttered free media service, Renren Yinshi this year.
Keeping An iQIYI
Without question, iQIYI remains deeply troubled. It will be some time before its inflated earnings and legal troubles won’t dominate its company narrative. But this is still a business with a significant base of Internet users. It operates in a culture where return on investments is measured in decades. And at roughly $25 a share, how much riskier is iQIYI than any one of the roughly 50 streaming media services competing for the same limited Western audiences?
Comebacks take time, and there will be stumbles. But for the near term, there will certainly be a lot to watch for with iQIYI.
