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Meet iQiyi (IQ), Wall Street's Trendiest New Chinese Stock

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Shares of iQiyi (IQ - Free Report) were up as much as 10% in early morning trading Monday, adding to the recent IPO company’s strong run that has seen its stock soar more than 80% since debuting in late March. Dubbed the “Netflix of China,” iQiyi is generating strong buzz as another interesting Chinese internet play, but investors should be sure to learn more about the firm before jumping in.

iQiyi was founded in 2010 through partnership between Chinese search engine behemoth Baidu (BIDU - Free Report) and American private investment firm Providence Equity Partners. Baidu would buy Providence’s stake and take 100% ownership of iQiyi just two years later, adding it to its growing list of non-search internet properties.

iQiyi is one of China’s largest online video websites and currently boasts more than 500 million monthly active users. The company draws comparisons to Netflix (NFLX - Free Report) because it operates a similar type of video-on-demand platform—although it likely resemblances a hybrid of Netflix, Hulu, YouTube, and other video-first sites.

Being under the Baidu umbrella certainly benefitted iQiyi in its early days, but the firm has generated interest from other investors too. Chinese smartphone maker Xiaomi and venture fund ShunWei Capital snagged about 10% to 15% of the company for $300 million in 2014, with Baidu investing an additional $100 million and retaining an 80% stake.

Meanwhile, iQiyi has consistently added to its entertainment arsenal, dolling out serious cash for the streaming rights to major Asian and foreign movies and TV shows. The website has launched a film production unit, established itself as a serious player at international film festivals, and even teamed up Netflix to secure Netflix original content for its own platform.

iQiyi has also shown some interest in expanding outside of this Netflix-like business model. The company recently opened its first brick-and-mortar theater in Zhongshan, Guangdong and plans to roll out more physical locations in large Chinese cities soon.

“Our business model is more like Disney’s than Netflix’s,” iQiyi CEO Tim Gong Yu said in a recent interview. “Netflix has mainly English-language content, with Hollywood culture at its core. For iQiyi, what we have is a big domestic market. But neither Chinese-language content nor Chinese culture has a huge audience overseas.”

Gong’s plan does not include building a network of theme parks, but it does mirror Disney’s diverse ecosystem of interconnected businesses. The CEO suggested that if a user is a fan of a particular iQiyi cartoon or TV drama, “he or she may also want to play a game or buy some merchandise based on a character” from that content.

The online entertainment industry in China was worth about $24.5 billion in 2016, but iQiyi believes that figure could increase by nearly 340% by 2022. That leaves the company plenty of opportunity within its core business model—and even more potential if it can successfully expand beyond that core.

iQiyi has filed one unaudited financial report since its IPO, showing revenue of about $778 million, up 57% year over year. The company also said that its net loss improved from $174 million in the first quarter of 2017 to just $63 million in the comparable period this year.

Analyst coverage on IQ is limited thus far, with our Zacks Consensus Estimate for earnings currently based on just one analyst projection. Still, that figure is calling for a loss of $7.80 per share on the year, with EPS improving about 17% in 2019.

Investors should note that recent IPO stocks are often extremely volatile in their first few months, and that volatility might be exacerbated as domestic investors grow more familiar with the Chinese company’s structure. Nevertheless, this red-hot young stock should stay on your radar.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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