Iqiyi: Lowering Fair Value by 21% on Continuing Membership Growth Concerns, Advertising Softness

We cut our fair value estimate for Iqiyi to $4.10 per share from $5.20 after lowering our second-quarter 2024 revenue forecast to CNY 7.4 billion from CNY 7.7 billion as we believe Iqiyi continues to see challenges with membership growth. We estimate the number of paying users only increased to 100 million in the second quarter, which reflects just a 1% increase sequentially and a 10% decline year on year. Additionally, we project average revenue per member, or ARM, to remain flat year on year, while we previously believed that it would increase by 5%-6%. Overall, this reflects a 5% year-on-year decline in second-quarter membership revenue instead of a 1% decline as previously forecast. We lowered our assumptions based on user feedback for the new lineup of shows that debuted in 2024. In addition, we believe advertising revenue is also seeing soft demand on Iqiyi’s platform and estimate it declines 3% year on year in the second quarter—which is a concern, given that the advertising business has shown consistent modest growth for the past five quarters and was previously forecast to increase 8% year on year for this quarter. Our valuation downgrade reflects not only the combination of our revisions for the second quarter of 2024, but also assumes that ARM will be flat and the number of paid users declines year on year for the rest of 2024, which lowers its five-year revenue compound annual growth rate to 3.4% from 4.5%.