iQIYI, Inc.'s (NASDAQ:IQ) 27% Share Price Plunge Could Signal Some Risk

To the annoyance of some shareholders, iQIYI, Inc. (NASDAQ:IQ) shares are down a considerable 27% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 56% loss during that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about iQIYI's P/S ratio of 0.7x, since the median price-to-sales (or "P/S") ratio for the Entertainment industry in the United States is also close to 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for iQIYI

How iQIYI Has Been Performing

iQIYI's revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

Keen to find out how analysts think iQIYI's future stacks up against the industry? In that case, our free report is a great place to start.

How Is iQIYI's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like iQIYI's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 6.8% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 5.1% each year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 9.9% per annum, which is noticeably more attractive.

In light of this, it's curious that iQIYI's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On iQIYI's P/S

With its share price dropping off a cliff, the P/S for iQIYI looks to be in line with the rest of the Entertainment industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look at the analysts forecasts of iQIYI's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for iQIYI that you need to take into consideration.

If you're unsure about the strength of iQIYI's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.