Iqiyi Earnings: Lower Valuation by 33% as Revenue Declines Again; Long-Term Headwinds Expected

We lower our fair value estimate by 33% for Iqiyi to $2.00 per share from $3.00 after it reported third-quarter 2024 revenue of CNY 7.2 billion, which reflected a 10% decline year on year, but was in line with our expectation. However, our valuation revision reflects company guidance for a 14% revenue decline year on year next quarter, which was worse than our forecast as we had anticipated the bottom this quarter. We believe the guidance reflects the long-term challenges for Iqiyi to return to subscriber growth without sacrificing profitability from heavy content costs. We believe subscribers have been gradually leaving the platform and estimate it is now down to 89 million from 100 million a year ago. We think Iqiyi is prioritizing profitability given that its balance sheet still has CNY 9 billion of net debt accumulated from heavy spending on content. However, its shift toward low-cost content appears to be souring due to user experience, as suggested by declines in membership and advertising revenue.