On Thursday, UBS raised the stock price target for iQIYI (NASDAQ:IQ), a leading online entertainment service in China, to $6.30 from $6.22, while keeping a Buy rating on the stock.
The adjustment follows the company's fourth quarter of 2023 results, which were considered to be in line with market expectations. The results indicated a weak subscriber count that was balanced by a strong average revenue per membership (ARM).
The first quarter of 2024 appears to be following a similar pattern to the last quarter, with UBS Evidence Lab data revealing a sequential decline in users for January and February, despite it being the Chinese New Year peak season. Yet, this decline was again counterbalanced by an increase in ARM.
Despite the near-term challenges, iQIYI's management has expressed confidence in the company's growth and profitability for the year 2024. They anticipate a stronger performance towards the end of the year, supported by the current content pipeline.
UBS analysts have slightly raised their adjusted operating profit forecast for iQIYI in 2024 to Rmb4.6 billion, which remains more conservative compared to the management's own targets.
The firm highlighted iQIYI's solid financial position, noting that there seems to be no immediate need for external fundraising. This is due to the company's capabilities to meet its convertible bond (CB) obligation of $400 million due in August 2024, with Rmb5.4 billion in cash and short-term investments reported at the end of the fourth quarter.
iQIYI's stock is currently trading at the lower end of the valuation spectrum compared to its peers within the China internet sector, at 8 times the estimated 2024 earnings. UBS estimates a compounded annual growth rate (CAGR) of 9% for iQIYI's earnings per share (EPS) from 2024 to 2026.
The firm maintains a Buy rating on the stock, suggesting that the risks are skewed towards the upside, especially considering the company's depressed valuation and the already low expectations of the market.
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