IQ is a streaming service company headquartered in Beijing, China. The Chinese streaming service jumped nearly 40% yesterday on some good news. Tencent Holdings, a multinational conglomerate, came out saying that they want to be the biggest shareholders in IQ to reduce competition. Baidu already owns 56% of IQ's shares, controlling over 90% of voting shares. Now there is potential competition for who can be the majority stakeholders in this company.
With a market cap of over $18 billion, the company looks extremely overvalued for what it's priced at. They have been increasing their losses for the past 5 years, losing hundreds of millions and now $1.5 billion.
But those losses don't seem to reflect how well the company has performed in sales. IQ raked in over $4.2 billion in revenue in 2019 with an EBITA (Earnings Before Interest Taxes and Amortization) $1.13 billion, meaning that they generate that much before taxes and spending. This growth company is only about 10 years old, and people could argue that they're no longer in their primary growth phase. But how can a company generate $1.13 billion and be at a loss of $1.49 billion by the end of a year?
One answer could be that they are spending lots of money on licenses to stream videos, producing online video games, virtual reality headsets and much more. Like Netflix, they want to create their own original shows as well as ebook stores. They spent $300 million alone just acquiring a mobile video game developer, Skymoons. IQ is looking to expand farther than Netflix if they are to compete with them, so they must spend lots of money in the meantime.
In 2018, IQ was at 87.4 million subscribers, and now they have 118.9 million. Nearly 100% of members are paid subscribers. At $3.00 a month, it seems like a pretty good deal for all this content. IQ has the lowest P:E ratio in five years, which can mean that less people are not willing to pay higher than its actual value, or it could mean that the company is not as overvalued as it once was. Lots of investors see this company with great potential, and the news from Tencent caused a huge surge in yesterday's session. Overall sentiment is still bullish, but short term traders look at this with more of a bearish mentality.
After the news from Tencent, there is not much left to be excited about in the short term. Yes, the company is still losing money, but sales have been enormously increasing over time. After this recent pop-up, I wouldn't look to buy just yet. I still feel confident that this company will do great in the future, so I've been looking to invest. In my opinion, the price has got to be cheaper for me to see it as an attractive buy. Tencent still hasn't invested and is still talking about it. So, this news could blow over and prices could fall. As soon as Tencent decides to go through with it, buying IQ could be a nice trade or maybe an investment for the believers in the next competitor of Netflix.
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Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.
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