Urbanization And 5G Will Expand Digital Entertainment Opportunities

Key Takeaways

• iQIYI's leadership in premium content, rapid international growth, and AI-driven innovation are driving outsized revenue and margin expansion beyond market expectations.
  
• Emerging monetization streams and unique offerings for urbanizing and younger audiences position the company for sustained subscriber, ARPU, and long-term earnings growth.
  
• Rising content costs, shifting viewer trends, regulatory constraints, limited global reach, and declining ads all threaten long-term growth and profitability for the company.

Catalysts

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

• Analyst consensus focuses on the upside from premium content and micro dramas, but is underestimating iQIYI's execution: iQIYI has already established itself as the top platform in both long-form and micro drama content, with user engagement and monetization for micro dramas growing at triple-digit rates, enabling outsized revenue and margin expansion as content costs remain low and scale efficiencies rapidly increase.
  
• While analysts expect solid overseas growth, they are overlooking the acceleration now possible: iQIYI's proven ability to rapidly adapt content for each region, alongside strong early profitability and surging demand for Chinese dramas globally, suggests that international revenues could become a significant percentage of total sales far sooner than the Street expects, significantly lifting consolidated revenue growth.
  
• The company is uniquely positioned to benefit from rising digital entertainment spending by urbanizing and younger consumers, with a broad and highly differentiated membership offering that is already showing traction in low-tier cities and among first-time subscribers, supporting a long runway for ARPU and subscriber growth.
  
• Massive advances in AI-driven video production, editing, and recommendation not only give iQIYI a cost advantage but also enable the creation of new interactive and personalized formats that could unlock additional monetization streams, substantially boosting future net margins and average revenue per user.
  
• Early-stage initiatives such as IP commercialization, immersive offline experiences, and direct e-commerce integrations provide potential for entirely new high-margin business lines, further diversifying revenue, increasing user lifetime value, and accelerating long-term earnings growth above current forecasts.

iQIYI Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on iQIYI compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming iQIYI's revenue will grow by 4.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.0% today to 8.1% in 3 years time.
• The bullish analysts expect earnings to reach CN¥2.6 billion (and earnings per share of CN¥2.7) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, down from 54.2x 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 13.21%, as per the Simply Wall St company report.

iQIYI Future Earnings Per Share Growth

Risks

• The surge in content costs, especially for premium dramas and increased investments in original productions across long-form and micro drama formats, may not be sufficiently offset by revenue growth from memberships or advertising, putting sustained pressure on gross margins and limiting long-term profitability.
  
• While iQIYI reports rapid growth in its micro drama user base, the overall industry trend is toward short-form, user-generated content on platforms like Douyin and Kuaishou, which could draw audiences away from curated streaming services, undermining future subscriber growth, engagement, and subscription revenues.
  
• Intensified regulatory oversight and internet controls in China, combined with content censorship and compliance costs, could constrain creative freedom, increase operational expenses, and potentially destabilize revenues through unpredictable policy changes that target online entertainment.
  
• The company's international expansion remains modest due to financial resource limitations, and ongoing geopolitical tensions could further hinder access to foreign markets and advanced technologies, impeding new growth opportunities and limiting the contribution of overseas revenues and profit to the group.
  
• Deterioration in advertising revenue-highlighted by sequential declines and described as seasonally and macroeconomically sensitive-is compounded by long-term industry shifts (such as the rise of ad blockers, stricter privacy regulation, and migration of ad budgets to alternative platforms) which together threaten to dilute iQIYI's advertising earnings and overall revenue mix.

Valuation

• The assumed bullish price target for iQIYI is $2.45, which is the highest price target estimate amongst analysts. 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 bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $2.45, and the most bearish reporting a price target of just $1.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CN¥32.0 billion, earnings will come to CN¥2.6 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 13.2%.
• Given the current share price of $2.28, the bullish analyst price target of $2.45 is 6.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.