Beijing, China-based iQIYI, Inc. (IQ) provides online entertainment services under the iQIYI brand in the People’s Republic of China. Shares of the streaming company have declined 70.5% in price over the past year and 71.3% year-to-date to close yesterday’s trading session at $5.01. Over the past month, the stock has slumped 24.7%. It is currently trading below its 50-day and 200-day moving averages, near its 52-week low of $4.23, which it hit on December 15.

IQ posted an unimpressive report in its most recent quarter and bleak guidance, which caused its shares to retreat. IQ expects its total net revenues to be within RMB7.08 billion ($1.10 billion) and RMB7.53 billion ($1.17 billion) in its fiscal fourth quarter, representing a 5% decrease to 1% increase year over year.

“We experienced significant uncertainty in terms of content scheduling, which resulted in softer than expected top-line performance,” explained Yu Gong, Founder, Director, and Chief Executive Officer of iQIYI. Its online advertising services revenue came in at RMB1.70 billion ($257.70 million), reflecting a 10% decrease year-over-year. IQ cited less premium content launched during the quarter and a challenging macroeconomic environment in China as responsible for the decline. The company expects the uncertainty related to content scheduling to remain in the coming months.

Here is what could shape IQ’s performance in the near term:

Poor Profitability

IQ’s 11.88% gross profit margin is 77% lower than the 51.66% industry average. Also, its 17.26% EBITDA margin is 21.3% lower than the 21.93% industry average.

Moreover, IQ’s ROE, ROA, and ROTC of negative 100.07%, 12.07%, and 8.84%, respectively, compare with the 9.36%, 3.00%, and 4.42% industry averages.

Mixed Valuation

In terms of forward Price/Book, IQ is currently trading at 5.68x, which is 110.4% higher than the 2.70x industry average. Also, its 11.34 forward Price/Cash Flow ratio is 13.3% higher than the 10.01 industry average.

However, IQ’s forward EV/Sales is 48.6% lower than the 2.44x industry average, and its forward Price/Sales is 52.5% lower than the 1.74x industry average.

Weak Bottom Line

IQ’s total revenues increased 5.6% year-over-year to RMB7.59 billion ($1.2 billion) in its fiscal third quarter, ended September 30. However, its operating loss stood at RMB1.37 billion ($212.30 million), up 13.1% from the same period last year. Its net loss attributable to the company grew 47.3% from its year-ago value to RMB1.73 billion ($268.4 million). The company’s net loss per ADS increased 34.8% year-over-year to RMB2.17 ($0.34). In addition, its free cash flow decreased 8.8% from the prior-year quarter to a negative RMB2.20 billion ($0.35 billion).

POWR Ratings Reflect This Bleak Prospects

IQ has an overall D rating, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Quality, which is consistent with its lower-than-industry profit margins.

IQ has a C grade for Value. Its mixed valuations justify this grade.

Of the 53 stocks in the F-rated China group, IQ is ranked #42.

Beyond what I have stated above, one can also view IQ’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the China group here.

Bottom Line

IQ reported bleak revenue guidance for the current quarter, and the Street expects its EPS to decline 3.1% year-over-year in the current quarter. Also, its EPS is expected to remain negative at least until the next year. And its lean profit margins and a negative 100.07% ROE is a concern. So, we think the stock is best avoided now.

How Does iQIYI, Inc. (IQ) Stack Up Against its Peers?

While IQ has an overall POWR Rating of D, one might want to consider investing in the following stocks with an A (Strong Buy) rating: Fuwei Films (Holdings) Co. Ltd. (FFHL) and NetEase Inc. (NTES).

IQ shares were trading at $4.80 per share on Thursday morning, down $0.21 (-4.19%). Year-to-date, IQ has declined -72.54%, versus a 27.74% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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