Bullish stock to watch: IQIYI Inc (NASDAQ: IQ)

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IQIYI Inc (NASDAQ: IQ), a Chinese video streaming company popularly considered China’s equivalent to Netflix Inc, stock surged 25.85% on June 16th, 2020 (Source: Google finance) after the report that Tencent was eyeing a potential investment in the company. Tencent intends to become the largest investor in iQIYI in order to lower costs and decrease its competition as demand for video streaming services have surged due to the coronavirus pandemic. Tencent has reportedly approached iQIYI’s majority holder, Baidu, to buy a stake in the company from them, though the talks are at an intial stage and is subject to change. Baidu holds a 56.2% stake in iQIYI, and controls 92.7% of the company’s voting shares. The potential deal between Tencent and iQIYI is expected to combine two streaming video giants that each had more than 110 million paid subscribers at the end of March. If this transaction happens, there will be improvement in the bargaining power when producing and purchasing content, and lower the marketing costs that would otherwise be spent on grabbing users from each other. Both iQIYI and Tencent have experienced a rise in cost for content as they compete with each other as well as operators of user-generated video sharing sites such as Bilibili Inc and Bytedance, owner of TikTok and domestic version Douyin.

Further, both of them taken together, China’s online video market had projected 2020 revenue to be of 156.6 billion yuan ($22.1 billion), according to iResearch and it should only grow larger in the years ahead. Tencent wants to control the lion’s share of this rapidly expanding market and it’s apparently willing to make aggressive moves to do so. iQIYI has posted an 11% increase in content costs in January-March compared the same period a year earlier, while revenue growth has fallen to 9% from 43%. The firm, which has yet to break even in its 10-year life, has reported a net loss of $406 million.

Moreover, if there will be need to raise capital to finance growth, iQIYI believes that deteriorating Sino-U.S. relations would deter investors, including main backer Baidu. Baidu itself is considering delisting from Nasdaq due to the diplomatic tension and moving to an exchange closer to home to increase its valuation. In addition, Chinese stocks have been under intense scrutiny recently, due to the revelation that Luckin Coffee committed fraud.

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