Chinese Regulatory Crackdowns And Piracy Will Squeeze Margins

Key Takeaways

• Regulatory pressures, piracy, and changing viewer habits threaten revenue streams, margins, and subscriber growth, challenging both near-term performance and long-term profitability.
  
• High content costs and saturated markets are likely to hinder user acquisition and limit iQIYI's ability to sustainably grow revenue and recover net income.
  
• International growth, premium content investment, supportive regulation, diverse monetization, and operational efficiency position the company for improved margins and sustainable long-term earnings.

Catalysts

Through its subsidiaries, provides online entertainment video services in the People’s Republic of China.

• Increasing regulatory intervention in China's media and internet sectors is likely to substantially raise compliance costs and introduce stricter content controls, which could hinder iQIYI's ability to scale its user base and limit the effectiveness of its advertising strategy, ultimately depressing revenue growth and squeezing operating margins in the coming years.
  
• As the domestic and global streaming markets approach saturation, iQIYI will likely face rising customer acquisition costs and slowed subscriber growth, causing its top-line expansion to lag and threatening its long-term earnings trajectory.
  
• Escalating investment in costly original content, both long-form and short-form, amid intensifying competition may not be matched by corresponding increases in subscriber or advertising revenue, putting persistent downward pressure on net margins and limiting net income recovery.
  
• With the proliferation of unauthorized digital content distribution and piracy in both China and key overseas markets, iQIYI's ability to effectively monetize its library is at risk, undermining sustainable revenue streams and damaging its long-range profitability outlook.
  
• Ongoing shifts in consumer preferences-especially toward ultra-short videos, gaming, and interactive forms of digital entertainment-are likely to erode engagement and viewership on iQIYI's core long-form platform, reducing the company's addressable market and jeopardizing future advertising and membership revenue.

iQIYI Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on iQIYI compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming iQIYI's revenue will decrease by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.0% today to 3.6% in 3 years time.
• The bearish analysts expect earnings to reach CN¥974.0 million (and earnings per share of CN¥1.39) by about August 2028, up from CN¥290.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.5x on those 2028 earnings, down from 54.6x today. This future PE is lower than the current PE for the US Entertainment industry at 37.1x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.28%, as per the Simply Wall St company report.

iQIYI Future Earnings Per Share Growth

Risks

• The company is experiencing strong momentum in its overseas expansion, with membership revenue and subscriber scale outside of Mainland China expanding for eight consecutive quarters, driving revenue growth and demonstrating the appeal of Chinese content internationally.
  
• iQIYI's focused investment in premium original content, across dramas, movies, and variety shows, has led to multiple record-breaking titles and critical industry awards, which can enhance user engagement, reduce long-term content acquisition costs, and support higher gross margins.
  
• New government policies in China's long-form video industry have shortened production cycles, improved content scheduling, increased creative freedom, and facilitated distribution through both online and traditional TV channels, potentially stabilizing or increasing revenue from content distribution and advertising.
  
• The company is diversifying its monetization with innovations such as micro dramas, bundled memberships, offline asset-light experiences, self-operated IP merchandising, and integrated ad products, which can create multiple new and higher-margin revenue streams.
  
• Ongoing improvements in cost control, operational efficiency, and the use of advanced AI for both content production and user engagement could drive net margin expansion and support sustainable long-term earnings.

Valuation

• The assumed bearish price target for iQIYI is $1.21, which represents two standard deviations below the consensus price target of $1.97. This valuation is based on what can be assumed as the expectations of iQIYI's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $2.5, and the most bearish reporting a price target of just $1.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥27.4 billion, earnings will come to CN¥974.0 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 13.3%.
  
• Given the current share price of $2.3, the bearish analyst price target of $1.21 is 90.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.