To The Moon

$iQiyi Inc.(IQ)$ released 22Q4 and the whole year financial report, an unexpected profit and greaterly improving free cash flow should send it to another YTD high?

Q4 Performance Review

• Revenue was 7.59 billion yuan, a year-on-year increase of 2.8%, higher than the market expectation of 7.50 billion yuan;
• Among them, member service revenue was 4.7 billion yuan, a year-on-year increase of 15%; Advertising revenue was 1.55 billion yuan, down 7% year-on-year, higher than the market expectation of 1.39 billion yuan;
• Non-GAAP comparable earnings before interest and tax is 978 million yuan, and the profit rate reaches 13%, which is higher than the market expectation of 499 million yuan;
• Comparable earnings per share is 0.98 yuan, which is higher than the market expectation of 0.44 yuan.

For the whole year

• Revenue was 29 billion yuan, down 5% year-on-year, which was the same as market expectations;
• Among them, member revenue was 17.7 billion yuan, a year-on-year increase of 6%, higher than the market expectation of 17.6 billion yuan; Advertising revenue was 5.33 billion yuan, down 24% year-on-year, higher than the market expectation of 5.17 billion yuan;
• Comparable earnings before interest and tax was 2.17 billion yuan, a year-on-year increase of 148%, higher than the market expectation of 1 billion yuan;
• The comparable earnings per share is 1.49 yuan, which successfully turns losses into profits. It is also the first time since the listing that the annual profit is positive

Brief comments

Market preference for growth stocks has gradually shifted from high growth rate to succeed realizing profit. Therefore, a turning point form losses into profits can win the favor of many institutional investors.

Cash flow has returned to positive for two consecutive quarters and reached 800 million yuan, all time high.

In the long run, the pattern of streaming media industry has not yet formed, because even if we start from the largest overseas platforms,$Netflix(NFLX)$,$Walt Disney(DIS)$Disney + and Hulu,$Amazon.com(AMZN)$In recent quarters, there are still fierce competition and changes in operational strategies. For example:

• Netflix wants to get the second growth curve through advertising and improve ARPU;;
• Disney should reduce costs and achieve break-even as soon as possible;

The domestic streaming media platforms also maintain a dynamic balance in the fierce competition, and each family began to rediscover the loss during the epidemic through new content.

From this point, investors need to pay attention to

First, the benefits brought by cost reduction and efficiency increase.In addition to realizing self-financing, it is almost impossible for long video platforms to reduce costs, because once losses continue, cash flow will continue to flow out, which will also affect the confidence of subsequent investors. After making a profit, it can provide a basis for the next capital inflow.

Second, the advertising business began to recover.The part of Q4's performance exceeding expectations mainly comes from advertising, and advertisers' investment is also confidence in the recovery in the post-epidemic era, which will continue to benefit in the next few quarters of 2023. And the profit margin of advertising business is often higher, which makes it easier to boost the overall profit margin of the company. Our observation organization is also optimistic about the advertising business in 2023, at least rising year on year.

Three, more Netflix elements. On the one hand, it is necessary to reduce the cost of content production (the salary limit of stars also plays a certain role), On the other hand, in order to break through many bottlenecks such as audience aesthetic fatigue and get explosive content, iQiyi has begun to learn some successful models of Netflix, such as the "hurricane" of the fire in early 2023, which is very likely that Netflix's "squid game" swept the world in that year, but iQiyi is only in China at present. It is very practical to improve users' stickiness and deepen their goodwill towards the platform by making high-quality content.

Fourth, proper corporate finance management.An additional issue (debt-to-equity) at the beginning of the year gave many investors a false alarm. In fact, the issuance not only balances the ratio of the company, but also reduces financial expenses (interest, etc.) and provides shareholders with the possibility of more returns.

There may be more debt-to-equity in the future, or even the second listing in Hong Kong will not be ruled out, while further optimizingthe ratios of the company.

In the last four quarters, iQiyi's interest expenses were around 180 million yuan, accounting for about 20% of Q4's earnings before interest and tax. If more convertible bonds can be transferred back to stocks in the future, it is expected to continue to increase profits.

US stock investors likes to buy on expectations, but they may not have feelings on iQiyi Company. Although most of the domestic investors are or used to be users of iQiyi, they may know more about it. The reason why the fundamentals are different this time is more from the perspective of the Chinese market.

iQiyi has been one of the best performer among Chinese stocks, will it be better?