The Motley Fool

2 Risks That Investors Should Know About Before Buying iQIYI

iQIYI Inc (NASDAQ: IQ) is a leading online video platform based in China. It is often referred to as the “Netflix of China” given the similarities in their business models.

For starters, iQIYI has a total subscribing member base of 105.8 million (as of 30 September 2019), 99.2% of whom were paying members. To put the above into perspective, Netflix has 158.3 million subscribers. Thus, iQIYI has about two-thirds of Netflix’s subscribers.

The company has attracted significant attention since its listing in 2018, mainly due to its potential to grow for the foreseeable future. Nevertheless, despite all its potential, investors should not ignore some of the risks that the company is facing.

In this article, I’ll highlight two of those risks.

Loss-making

To start with, iQIYI has been incurring losses since its inception, including net losses of RMB 3.1 billion (US$441 million), RMB 3.7 billion, and RMB 9.1 billion in 2016, 2017 and 2018, respectively.

So far, there’s no sign that such losses will turnaround anytime soon. In fact, in its recent quarterly results, iQIYI reported that its net loss grew from RMB 3.1 billion last year to RMB 3.7 billion this quarter. Such losses are huge, especially considering that revenue actually grew by “only” 7% during the same period.

For investors who are bullish on the company, such losses are acceptable considering that the company is still in an early stage of growing its business. Still, such investors should note that the company has been burning its cash rapidly, and a continued loss-making business will mean that new capital will be needed in the near future.

Competition

The company, despite its dominance in China, faces significant competition. On the one hand, it’s facing competition from Tencent Video and Youku Tudou in its online video business. Moreover, it also faces competition from traditional media such as major TV stations, which are increasing their internet video offerings.

On the other hand, it also faces competition for users and user time from other internet media and entertainment services, such as internet and social platforms that offer content in emerging and innovative media formats (such as Douyin, Weibo and others).

To compete against its competitors in attracting and retaining users, iQIYI must continue to offer high-quality content, especially popular original content, in a cost-effective manner. Failure to do so will result in reduced user traffic, which in turn, could result in lower subscriptions as well as advertising income.

Conclusion

In all, I think iQIYI is a company well-positioned to grow its business for the foreseeable future.

Yet, the company is facing significant challenges ahead, including its significant loss-making position and intensifying competition. Investors should, therefore, consider both the risks and rewards before taking a position in the company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.