BofA cuts iQIYI target to $3.60, maintains buy rating

On Thursday, BofA Securities made adjustments to its outlook on iQIYI (NASDAQ: IQ), reducing the price target to $3.60 from a previous $4.30, yet reaffirming a Buy rating for the stock. The revision follows the company's third-quarter performance, which aligned with expectations in its core business and operational profit trends. However, the analyst noted a one-off item that contributed to a net profit beat.

The analyst expressed a cautious stance on the growth prospects of iQIYI's long-form video business, citing a decline in market share and fewer top content releases year-to-date in 2024. Additionally, industry-wide challenges such as the rise of short-drama formats and shifting user preferences toward mobile-friendly, time-efficient content series were highlighted as headwinds.

iQIYI has indicated plans to adapt its content strategy to these market changes, including launching short-drama content from the fourth quarter of 2024. The company intends to enhance its IQ and IQ Light versions with more short-drama offerings and an advertising business model on IQ Light. It also plans to offer short-drama content to its existing paying subscribers, a move seen as a defensive strategy to maintain user traffic.

The company's content supply in the near term will primarily consist of third-party or exclusive content, with intentions to explore first-party models in the future. A return on investment-focused approach is anticipated, as short-drama content production costs are lower than those of long-form content. This strategy is expected to offset investments in short-drama content by optimizing less profitable long-form content.

Despite near-term business restructuring, iQIYI reaffirmed its commitment to long-term profit growth through cost and operational optimization. However, the company anticipates continued quarter-over-quarter weakness in its subscriber business for the fourth quarter due to a lack of key content releases.

Consequently, the analyst has lowered the 2025-2026 earnings estimates by 15-19% and adjusted the price objective to $3.60, based on the same 10x 2025 estimated P/E ratio. The Buy rating is maintained, reflecting the analyst's view of a valuation lower than peers and potential for growth from the new short-drama business.

In other recent news, Jefferies has adjusted its outlook on iQIYI, reducing the price target to $3.00 while maintaining a Buy rating. This follows iQIYI's recent disclosure of its Q3 results, which revealed revenue figures in line with analyst projections and non-GAAP earnings exceeding expectations. The company reported a 10% year-over-year decline in total revenue, amounting to RMB 7.2 billion, yet maintained a positive operating cash flow for the 10th consecutive quarter. Membership services revenue saw a 13% decrease, while advertising revenue fell by 20%. However, distribution revenue rose by 52%, offsetting some of the declines.

In response to these developments, iQIYI has emphasized its focus on diversifying content, particularly through the enhancement of mini and short drama offerings. The company has also introduced two distinct app experiences and continues to expand overseas, with membership revenue growth exceeding 40% in regions such as Hong Kong, the UK, Brazil, and Australia. Despite the revenue challenges and the softer outlook for content distribution, Jefferies maintains its positive stance on iQIYI's stock.

InvestingPro Insights

Recent InvestingPro data provides additional context to iQIYI's current market position and financial performance. The company's market capitalization stands at $2.09 billion, with a P/E ratio of 10.7, suggesting a relatively low valuation compared to earnings. This aligns with one of the InvestingPro Tips, which notes that iQIYI is "Trading at a low earnings multiple."

The company's revenue for the last twelve months as of Q2 2024 was $4.28 billion, with an operating income margin of 9.84%. While these figures demonstrate profitability, the revenue growth has been negative at -0.41% over the same period, reflecting the challenges mentioned in the article regarding market share and content strategy.

InvestingPro Tips highlight that 8 analysts have revised their earnings upwards for the upcoming period, which could indicate some optimism despite the challenges outlined in the BofA Securities report. Additionally, the stock is trading near its 52-week low, with the price having fallen significantly over the last year, three months, and six months. This price movement correlates with the analyst's cautious stance on growth prospects and the need for business restructuring.

For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for iQIYI, providing a deeper understanding of the company's financial health and market position.

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