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Commonly referred to as the Netflix (NASDAQ:NFLX) of China, iQiyi (NASDAQ:IQ) went public Mar. 30. Since then, IQ stock has gone on a roller-coaster ride with a 52-week high-low spread of $30.93, which is a lot for a stock whose IPO price was just $18.
You would think with all the trade-war talk that investors would be scared of buying into Chinese stocks listed on U.S. exchanges, but that doesn’t appear to be the case with iQiyi.
In two days at the end of June, IQ stock lost 26% of its value only to regain most of those losses over the next two weeks.
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There are a lot of investors who don’t want to miss out on the second coming of Netflix and are willing to buy IQ stock at any price to get in on the action.
Here’s Why That’s a Bad Idea
CNBC’s Jim Cramer recently gave a traditional explanation why you might want to think twice about buying iQiyi.
“In the midst of the trade tensions with the People’s Republic, China-based companies keep coming public here, and their stocks have been roaring,” Cramer said Jul. 5 on Mad Money. “Many of these names, though, [are of] dubious quality.”
He’s right.
IQiyi had an operating loss of $169.4 million in the first quarter on $777.6 million in revenue. While revenues increased 57% year-over-year, its operating loss was only marginally higher from last year, which is either positive or negative depending on your viewpoint.
If you subscribe to the idea that a company has to scale its business before making money, then the fact it didn’t have a higher loss in Q1 2018 is a sign that it will get to money-making status sooner rather than later.
However, if you believe that 57% growth in revenue should deliver a corresponding decrease in operating losses, then iQiyi is failing miserably.
The IPO Market Is Ready for a Correction
Regardless of whether you believe Chinese companies are the real deal or all smoke and mirrors, it is the state of the IPO market that should have you skeptical of IQ stock moving higher.
“Here’s the bottom line: even with the recent downturn in newly minted IPOs, the market for IPOs is red-hot and these big deals [will] keep coming,” Cramer said. “The next time some fresh-faced IPO catches fire, think about all of the recent turmoil and remember to take profits rather than letting your gains ride, at least on a portion of your position.”