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Here’s My Top Tech Stock to Buy in May

Here’s My Top Tech Stock to Buy in May

Posted On May 6, 2019 2:06 pm
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It’s been a wild ride for iQiyi (NASDAQ:IQ) shareholders. The Chinese streaming video stock was spun off from search-giant parent Baidu (NASDAQ:BIDU) and hit the market at the end of March last year at $18 per share. Shares have traded below $14.50 and above $46 within the past 12 months, but have more recently been hovering in the $22 range — a price that values the company at roughly 3.3 times this year’s expected sales. That’s still a growth-dependent valuation, but it’s one that I think presents an attractive entry point.

Investors should approach iQiyi with the knowledge that it’s prone to volatile swings. However, shares present big upside at current prices, and I think there’s a good chance that long-term shareholders will see strong returns. With the company due to report earnings on May 16, it’s my top stock to buy this month.

A leader in China’s streaming market

iQiyi has often been referred to as “the Netflix of China.” And while the company’s business also hinges heavily on producing and collecting video content for distribution on its streaming service, it’s fair to say the company has more of a diversified focus than the American streaming video leader.

In addition to its core subscription and ad-supported video services, iQiyi creates and publishes video games, operates social media and short-video platforms, has its own line of virtual-reality headsets, operates a platform for books and graphic novels, and has other elements that set it apart from “the Netflix model.” It’s also putting a lot of long-term emphasis on building a merchandise licensing business.

So, while the company doesn’t have any theme parks or stated plans to get into that business, it’s not unreasonable that management would prefer that iQiyi be thought of as “the Disney of China” — a diversified multimedia company with a range of growth avenues built around its core content offerings.  Simplicity can be an desirable quality for a business, but there’s a lot to like about the multimedia assets that iQiyi is creating and putting together and the momentum that’s helping to create.

The company grew annual revenue 52% to reach $3.6 billion and added 36 million new members to its premium subscription service last year. Such rapid expansion has come at a steep cost, with iQiyi posting a whopping $1.3 billion net loss across its first four reported quarters as a publicly traded company — and it’s not surprising that some investors have balked at the losses. That said, iQiyi is playing the long game, and I think the outlook for the business and China’s broader streaming video industry remain very promising.

This growth story is still just heating up

iQiyi once again expects to add somewhere in the neighborhood of 36 million subscribers to its paid service this year, suggesting that the company will end 2019 with somewhere near 120 million subscribers. That’s up from just 5 million paying members in May 2015. For comparison, Netflix has roughly 150 million global subscribers today and has been focused on subscription-based model for much longer than iQiyi.

iQiyi CEO Gong Yu recently quoted figures suggesting that 69% of American families subscribe to Netflix, while just 20% of Chinese families are subscribed to iQiyi. As long as China’s economy continues to grow at a solid clip and per-household discretionary spending rises over the long term, the multimedia company has feasible avenues to making its business consistently profitable and delivering huge returns for shareholders. A report published by Brand Finance named iQiyi as the world’s fastest-growing brand in 2018, and big sales and member growth for the company’s core subscription business show that it has great momentum and help put its big content and technology spending in context.

The Chinese media company is…

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