Iqiyi Earnings: Encouraged by Continued Profitability, but Retaining Subscribers Remains a Challenge

We maintain our fair value estimate of $5.20 for no-moat Iqiyi after third-quarter results were mixed as operating margins (stock-based expenses included) increased 150 basis points to 9.3% and revenue increased 7% year on year, driven by higher monthly average revenue per membership, but users continued to gradually decline on the video-on-demand platform from its first-quarter 2023 peak. Overall, revenue was driven by membership revenue of 9% year on year as ARM increased by 12% during the same time to CNY 15.54 from CNY 13.90. Ad revenue growth of 34% year on year also contributed to overall growth as Iqiyi continues to add incremental performance-based ads to its platform. Management did not provide guidance for the next quarter, but expects ARM to grow further. We expect Iqiyi to remain profitable as it develops further in-house content that is cheaper to make, than acquiring third-party content. However, we believe that until Iqiyi can consistently show an increase in users, the company’s valuation ceiling is limited.