Iqiyi Earnings: Fair Value Cut by 27% as More Membership and Advertising Revenue Decline Expected

We lower our fair value estimate for Iqiyi to $3.00 per share from $4.10 after second-quarter revenue of CNY 7.4 billion that was in line with our and consensus estimates, but represented a 5% year-on year decline. We expect third-quarter revenue to further fall 9% year on year due to more headwinds for Iqiyi’s membership and advertising business, caused by the loss of subscriptions over the lack of high-quality content. Iqiyi has long experienced challenges with retaining users given the lack of switching costs, and headwinds were evident as membership revenue declined by 14% year on year as its summer seasonal programming was not well-received. While its new programming in the third quarter should be better and cater to a wider audience, Iqiyi expects more headwinds as it bottoms out before revenue recovers in the fourth quarter. Despite the change in content, we think fourth-quarter user or revenue recovery is not guaranteed beyond 2024. The guided revenue decline next quarter gives us greater concerns given the intensifying competition within the TV streaming industry, and our downgrade reflects lower gross margin, membership slowdown, and slower advertising growth in the long term. We would like to see signs of multiquarter recovery before recommending a long position for Iqiyi.