This Chinese Entertainment Company Could Be a Great Trade
iQIYI, Inc. (Nasdaq: IQ) is a China based company principally engaged in the provision of online entertainment services. The company mainly provides genuine video content such as movies, television dramas, variety shows and anime through its application platform.
Through the platform, the company mainly provides The Lost Tomb, The Mystic Nine, Burning Ice, Qipa Talk, The Rap of China and other programs for its customers. The company has built an entertainment-based social media platform, iQIYI Paopao, for fans to follow and interact with celebrities and the entertainment community.
The company recently announced that total revenues in the last three months of 2018 were RMB7.0 billion (US$1.0 billion), representing a 55% increase from the same period in 2017.
Operating loss was RMB3.3 billion (US$483.5 million) and operating loss margin was 47%, compared to operating loss of RMB856.1 million and operating loss margin of 19% in the same period in 2017.
Net loss attributable to iQIYI was RMB3.5 billion (US$505.7 million), compared to net loss attributable to iQIYI of RMB612.4 million in the same period in 2017. Diluted net loss attributable to iQIYI per ADS was RMB4.83 (US$0.70).
The number of total subscribing members was 87.4 million as of December 31, 2018, 98.5% of whom were paying subscribing members. This compares to 50.8 million of total subscribing members as of December 31, 2017, up 72% year over year.
Traders seemed to be pleased with the results.
For the full year, total revenues were RMB25.0 billion (US$3.6 billion), representing a 52% increase from 2017. Operating loss was RMB8.3 billion (US$1.2 billion) and operating loss margin was 33%, compared to operating loss of RMB4.0 billion and operating loss margin of 24% in 2017.
Net loss attributable to iQIYI was RMB9.1 billion (US$1.3 billion), compared to net loss attributable to iQIYI of RMB3.7 billion in 2017. Diluted net loss attributable to iQIYI per ADS was RMB17.01 (US$2.45).
“We delivered another quarter of solid growth and closed out the year on a strong footing with over 87 million total subscribing members,” commented Dr. Yu Gong, Founder, Director and Chief Executive Officer of iQIYI.
“As we enter 2019, we are confident in generating growth across the board, led by membership services which has demonstrated continued momentum.
We maintain our strategic focus on producing original premium content and will continue to advance our technology innovation and nurture our ecosystem to fully leverage the tremendous IP value in our content.
With an exciting new year ahead, we look forward to further strengthening our platform and continuing our journey to become a technology-based entertainment giant.”
“We are pleased to report strong top-line growth for fiscal year 2018 with total revenues increasing 52% year-over-year to RMB25 billion,” commented Mr. Xiaodong Wang, Chief Financial Officer of iQIYI.
“Membership business continued to be the main engine driving our growth, while we further broadened and diversified other revenue streams. 2018 was also a transition year for us, as we devoted more resources towards producing original content which added pressure to our margins.
We believe our investment in premium content will prove to be very rewarding and help better position the Company for long-term growth.”
The stock could be breaking out of a bottoming pattern.
A Trade for Short Term Bulls
As with the ownership of any stock, buying IQ could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for IQ
Every day, we scan the markets looking for trades that IQ low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For IQ, the April 18 options allow a trader to gain exposure to the stock.
An April 18 $30 call option can be bought for about $1.00 and the April 18 $32.50 call could be sold for about $0.55. This trade would cost $0.45 to open, or $45 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $45.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in IQ the maximum gain is $205 ($32.50 – $30 = $2.50; $2.50 – $0.45 = $2.05). This represents $205 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $45 to open this trade.
That is a potential gain of about 355% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.