Jefferies cuts iQIYI stock price target to $2.60, keeps buy rating

On Thursday, Jefferies updated their assessment of iQIYI (NASDAQ:IQ), reducing the price target for the company’s stock to $2.60 from the previous $3.00. Despite this adjustment, the firm has maintained a Buy rating on the shares. Currently trading at $1.69, InvestingPro analysis suggests the stock is undervalued, with a Fair Value calculation supporting Jefferies’ positive outlook. The decision comes amid expectations that iQIYI will perform in line with revenue estimates for the quarter, supported by successful content distribution and other revenue streams compensating for weaker online advertising performance. The company generated $4 billion in revenue over the last twelve months, maintaining a healthy gross profit margin of 25.2%. According to InvestingPro data, iQIYI remains profitable with positive earnings and strong free cash flow yield.

The analyst at Jefferies anticipates that iQIYI’s membership revenue will meet targets, reflecting the company’s ability to sustain its business model. However, the revised non-GAAP operating profit forecast takes into account increased content and operating expenses in the first quarter, attributed to investments in mini-dramas and a new game release. These mini-dramas are reportedly gaining traction, as indicated by growing unique viewer (UV) numbers.

Jefferies’ analysis acknowledges the higher costs associated with the production and promotion of these new content formats, which are essential for iQIYI’s strategy to attract and retain viewers. Despite the increased expenditure, the firm’s competitive advantage is deemed to be unaffected, as the analyst notes that iQIYI’s competitive moat remains intact.

The endorsement of iQIYI’s strategy and the affirmation of a Buy rating suggest that Jefferies sees potential in the company’s approach to content and game offerings. This potential is expected to outweigh the short-term increase in operating costs, leading to a positive outlook for iQIYI’s future performance in the market. InvestingPro subscribers have access to 12 additional key insights about iQIYI, including detailed analysis of its financial health, market position, and growth prospects through comprehensive Pro Research Reports available for over 1,400 US stocks.

In other recent news, iQIYI announced the pricing of a $350 million convertible notes offering, expected to close on February 24, 2025. The proceeds from this offering, approximately $344.8 million net, are intended for debt repayment and general corporate purposes. Concurrently, iQIYI has repurchased about $300 million of existing notes, which could influence the market price of its American Depositary Shares (ADSs). In its financial results, iQIYI reported a 14% year-over-year revenue decline for the fourth quarter of 2024, with membership revenue dropping by 15%. Analysts from Benchmark maintained a Hold rating, noting challenges in revenue growth but acknowledging some positive developments in content releases and subscriber engagement. CFRA also maintained a Hold rating while raising the stock price target to $2.50, citing expectations of a 4% revenue growth in 2025. Tiger Securities echoed this sentiment with a Hold rating and a $2.50 price target, noting a sequential rebound in membership revenue for the first quarter of 2025. Meanwhile, Citi analysts increased the price target to $3.10 and maintained a Buy rating, highlighting the company’s strategic focus on premium content and monetization strategies for 2025.

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