TLDR
- CLSA upgraded iQIYI from Hold to Outperform, raising price target to $2.45 from $1.70
- Second-quarter revenue expected to drop 11% year-over-year to 6.6 billion yuan
- Content costs remain flat but gross profit margin pressured to 20.6%
- Upgrade reflects removal of 20% valuation discount due to potential regulatory relaxation in China
- Stock shows strong momentum with 25.95% return over past week
CLSA has given iQIYI a fresh vote of confidence, upgrading the Chinese streaming giant from Hold to Outperform just ahead of its second-quarter earnings announcement. The investment bank also boosted its price target to $2.45 from $1.70.
The timing couldn’t be more interesting. iQIYI is set to report its second-quarter 2025 results on August 20, and analysts are bracing for some mixed numbers.
Revenue is expected to take a hit, declining 11% year-over-year to 6.6 billion yuan. Membership revenue looks particularly soft, with CLSA forecasting a 9% drop to 4.1 billion yuan.
The culprit here appears to be reduced premium content during what the company calls its “low season.” It’s a familiar pattern for streaming platforms that rely heavily on content cycles.
Advertising Revenue Under Pressure
The advertising side of the business faces its own headwinds. CLSA expects ad revenue to fall 13% year-over-year during the quarter.
Performance advertising took a beating during China’s 618 shopping period, when demand typically runs weak. However, there might be a silver lining in brand advertising.
Popular variety shows like Kings of Comedy could help brand advertising revenue recover on a quarter-over-quarter basis. Content remains king in the streaming world, and hit shows can move the revenue needle.
Margin Pressure Despite Flat Costs
Content costs are projected to stay flat at 3.79 billion yuan quarter-over-quarter. While that sounds like good news for cost control, it’s actually creating margin pressure.
CLSA estimates the gross profit margin will compress to 20.6%. That represents a 3 percentage point drop year-over-year and a 4.2 percentage point decline quarter-over-quarter.
The math is straightforward: when revenue falls faster than costs, margins get squeezed. iQIYI isn’t immune to this basic business reality.
Adjusted operating profit is expected to tumble to 80 million yuan for the second quarter. That’s a sharp drop from the 501 million yuan posted in the same period last year.
The Regulatory Angle
Here’s where things get interesting from an investment perspective. CLSA’s upgrade isn’t really about the near-term numbers, which look challenging.
Instead, the firm removed a 20% valuation discount it had previously applied due to regulatory concerns in China. The thinking is that regulatory pressure might be easing.
This regulatory relaxation theme has been gaining traction among China-focused analysts. It represents a meaningful shift in how investors view Chinese tech stocks.
CLSA maintained its 2025 adjusted operating profit forecast at 1.08 billion yuan. The firm expects sequential improvement as new drama and film releases hit the platform.
The stock has been responding positively to this narrative shift. iQIYI shares posted a 25.95% return over the past week, suggesting investors are buying into the story.
Current trading puts the stock at $2.33 with a market cap of $1.92 billion. The company maintains a gross margin of 24.05%, though liquidity appears tight with a current ratio of 0.46.
Four analysts have recently revised their earnings estimates upward, according to market data. This suggests the investment community is becoming more optimistic about iQIYI’s prospects.
iQIYI’s first-quarter 2025 revenue exceeded analyst expectations, though earnings fell short of forecasts. Management had previously guided for flat second-quarter revenue, implying a potential 3-4% year-over-year decline.
