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Jul 26, 2021
[5 min Read]
Disclosure: I was previously short this stock via puts. Those puts were closed Friday following the news regarding Chinese tutoring companies.
For the overview of what kind of stock IQ is, refer to this link:
That guy explains it pretty well. In short, it's a streaming platform that also makes original series and movies that also generates more than 20% of Baidu's revenues as Baidu is a majority owner. I'm here to give an update of what has happened since then. I will be repeating some of the highlights from what this post says as I feel they are important.
Link to my previous thread detailing IQ short DD:
Tl;Dr version: Positive catalysts, very strong Q1, aggressive cost cutting measures, improved content + delivery, incredibly high recent institutional buys could not drive the price up - therefore it is going down as long as there is not a market changing event.
But that market event has happened. On Friday.
Shares outstanding : 790 million shares
Float: 310 million shares
Morgan Stanley (as of June 17, 2021) owns 133 million shares
MS owns 16.8% (133/790) of shares outstanding, equaling 42.9% of float (133/310)
Archegos liquidation amount by Credit Suisse = 35 million shares
MS has 3.8x that amount now (133/35)
December 2020 share offering 40 million shares @ $17.50/share
Q1 earnings bested expectations, and with continued cost reduction measures Q2 earnings, which report 2nd week of August, should be very good too.
Current price is $11.30.
Fair value: $20.80 - $23.42
Value relative to Netflix: $37, based on a $500 Netflix valuation (adjusted for subscribers, revenue/earnings per share, subscription pricing, profitability, price/book).
December 2020 offering price: $17.50
Short Interest: 15% as of June 2021 - I am confident this has gone up significantly.
Netflix (Global): ~207 subscribers
Youku (China): ~85m subscribers
Tencent Video (China): ~115m subscribers
iQiyi (China): ~105m subscribers
Beats across the last 4 quarters with upside surprises of 20-40%
Q1 2021 Earnings highlights:
Revenue: 8 billion RMB / 1.2-1.3 billion USD; 4% revenue increase over Q1 2020, 6.6% increase over Q4 2020
Operating loss: $154.8 million -> Loss Margin: 13% Q1 '21 compared to 18% Q4 2020 and 29% Q1 2020
Basically - iQiyi cut losses by 30% QoQ and 45% YoY and are continuously trimming costs
Subscriber count increased by 3.6 million QoQ, and membership services revenue increased 12% QoQ; subscriber count is projected to increase at an accelerated pace as more
Content distribution revenue increased by 29% in Q1 2021 over Q1 2020 (which was also a 29% increase over 2019)
Advertising services revenue increased by 25% in Q1 2021 over Q1 2020, recovering the entire Q1 2019 - Q1 2020 deficit.
Chart of most popular Chinese Dramas in first half of 2021, note the dominance of iQiyi exclusive and that iQiyi is the top service provider:
Expansion of services to US and Canada:
Tencent recently raised their subscription prices by up to 50% back in April. This should direct more subscribing users to iQiyi.
With all this said -
OK - So why was I previously short then? And why am I long now?
My previous short thesis was essentially that - all of these good news coming from Iqiyi were coming almost constantly, but the stock has been only going down, underperforming other Chinese tech stocks, even those with directly negative news catalysts like Doyu and Huya and Tencent Music Entertainment.
Basically the stock was moving down based on nothing, despite being a stock that normally trades in a comfortable range of $18 to $28.
I had expected factors to hold constant, and a short volume to hold steady or decrease as the price went down, with people beginning to take long positions and early losses so long as nothing happened after my entry date up to mid-August earnings.
But then the news regarding restrictions on tutoring companies came to pass, and it smashed all Chinese tech stocks. Unlike before where IQ would make downward moves independently of other American-listed Chinese tech, this move brought everyone down together.
If IQ stock had been following the prior trend, this should have lost as much as if not more than Bilibili, which fell 12%. Instead, IQ stock fell 6.6%, around half the move.
While the flow of shares and options were undeniably bearish on Friday, there were two more things I noted which made me close my puts: The first was a 5 million dollar large block buy, and a purchase of 10,000 December 17 12.5 calls at the ask for a little over 1.3 million dollars in premium.
Daily short volume has now exceeded 50%, up from 40% when I posted a week and a half ago.
The selling and the put buying that was bringing IQ down Friday is not as potent as it was over the past 3 weeks.
45 million shares were short as of June 30, 2021 - that's around 15% short interest of the float of 310 million shares. I have been watching the volume traded intraday since end of June and I am confident that that 15% short interest has now gone up significantly.
The diminishing effect of shorting China names can also be observed in the larger Chinese tech companies like Alibaba, Tencent, Baidu (which owns most of iQiyi), and JD.
The short iQiyi trade is now crowded.
Thus I closed my puts and have started accumulating calls, despite my previous target price (7.5) not hitting.
IQ stock has upside risk in that it could rebound. Earnings are expected to come out in around 3 weeks on August 12. Even a rebound from this drop can result in the start of an uptrend. If the uptrend persists into earnings (IQ's uptrends historically last for 5-6 weeks) a strong earnings, which is likely, will smash through several technical levels and send the stock price upward, potentially breaking back up into its old trading range of $18+. Yes, this is using downward moves as a contrarian indicator, but for IQ stock it worked on the downtrend and I expect it to work for the rebound too.
Thus, I am willing to be aggressive. My new position is $IQ September 17 $15 calls, which I have started accumulating Friday after closing my same strike/expiry puts. Based on the prior moves, I am targeting $19-$23 by September