Iqiyi Earnings: Cost-Driven Profitability and Cash Flow Improving, but Subscriber Growth Stalling

We retain our fair value estimate of $5.20 per share for Iqiyi after fourth-quarter revenue of CNY 7.71 billion was in line with our estimate of CNY 7.68 billion. The firm generated GAAP operating margins of 7%-10% consistently for five consecutive quarters, leading us to be more confident about the company's outlook and long-term positive cash flow. Margin expansion was cost-driven as revenue grew only 1% year on year, but Iqiyi continues to be prudent in content spending. It expects further margin improvement next year, but this would be driven by the top line as it plans to increase its monthly subscription fees. Iqiyi guided to $5 billion in non-GAAP operating income for 2024, representing a 37% increase year on year and margin expansion of 300 basis points. It did not indicate the 2024 fee increase, but we estimate an increase to an average fee of CNY 18 per month, which suggests a 20% year-on-year increase. This is consistent with Iqiyi’s long-term strategy, as it remains confident that it can increase monthly subscription fees to CNY 20-CNY 25 while reaching 150-200 million users on a long-term basis.