iQIYI, Inc.'s (NASDAQ:IQ) Shareholders Might Be Looking For Exit

With a median price-to-sales (or "P/S") ratio of close to 1.2x in the Entertainment industry in the United States, you could be forgiven for feeling indifferent about iQIYI, Inc.'s (NASDAQ:IQ) P/S ratio of 1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for iQIYI

What Does iQIYI's P/S Mean For Shareholders?

iQIYI's revenue growth of late has been pretty similar to most other companies. The P/S ratio is probably moderate because investors think this modest revenue performance will continue. Those who are bullish on iQIYI will be hoping that revenue performance can pick up, so that they can pick up the stock at a slightly lower valuation.

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.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, iQIYI would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 10%. Revenue has also lifted 6.8% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 6.6% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 9.9% per annum, which is noticeably more attractive.

With this in mind, we find it intriguing that iQIYI's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for iQIYI that you should be aware of.

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.