Will Expand Into Southeast Asia And Brazil With Mini Dramas And AI-driven Content

Key Takeaways

• Expanding premium content and leveraging AI in production aim to boost user engagement, reduce costs, and enhance long-term earnings potential.
  
• International expansion and redefined membership offerings focus on revenue growth, market diversification, and improved subscription retention.
  
• Declining revenue across segments due to content challenges suggests potential risks in maintaining subscriber growth, advertising partnerships, and revenue diversification, impacting profitability.

Catalysts

Provides online entertainment video services in the People’s Republic of China.

• iQIYI's strategy to expand its premium content offerings, especially in long-form videos, mini dramas, and female-oriented content, aims to increase user engagement and drive higher membership and ad revenues.
  
• Investment in mini dramas, leveraging a growing user preference for short-content formats and enhanced monetization with an upgraded ad placement system, is expected to boost both user base and advertising revenue.
  
• The company’s focus on international expansion, particularly in high-potential markets like Southeast Asia, the Middle East, Latin America, and Brazil, indicates significant potential for revenue growth and diversification.
  
• Enhancement in membership benefits and reclassification of membership offerings to include more tailored services and crack down on password sharing aims to improve member retention and attract new subscribers, supporting subscription revenue growth.
  
• Strategic use of AI in content production to improve efficiency and reduce costs, alongside an expanded digital asset library, targets long-term margin improvement and enhances the potential for improved earnings.

iQIYI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming iQIYI's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.6% today to 6.6% in 3 years time.
• Analysts expect earnings to reach CN¥2.1 billion (and earnings per share of CN¥2.3) by about March 2028, up from CN¥764.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥2.6 billion in earnings, and the most bearish expecting CN¥1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, down from 20.9x today. This future PE is lower than the current PE for the US Entertainment industry at 22.6x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.88%, as per the Simply Wall St company report.

iQIYI Future Earnings Per Share Growth

Risks

• Revenue declined 14% year-over-year in Q4, partly due to a lighter content slate, which could continue to impact earnings if not addressed with stronger and more consistent content offerings.
  
• Membership revenue dropped 15% annually, primarily due to content issues, indicating potential challenges in subscriber growth and retention, affecting long-term revenue and profitability.
  
• Online advertising revenue decreased by 13% year-over-year, highlighting risks in maintaining strong advertising partnerships and operational effectiveness, which could impact net margins.
  
• Content distribution revenue fell by 20% annually, pointing to potential weaknesses in leveraging theatrical releases and partnerships, thereby impacting overall revenue diversification.
  
• Heavy reliance on premium long-form content and its production could lead to financial strain if content fails to attract sufficient viewership, affecting both revenue and profit margins.

Valuation

• The analysts have a consensus price target of $2.547 for iQIYI based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.5, and the most bearish reporting a price target of just $1.79.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥31.3 billion, earnings will come to CN¥2.1 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 11.9%.
  
• Given the current share price of $2.3, the analyst price target of $2.55 is 9.7% higher.
  
• 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.