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iQIYI Stock: How Hot Is Too Hot?

Since its debut less than three months ago, iQIYI stock has been one of the market’s hottest stocks. But has “the Netflix of China” become overcooked?

iQIYI (IQ) is a topic of lots of excited conversations right now, with many investors tied in knots because they’re not in it and want to know if it’s too late, or because they are in it and want to know whether they should get out. I have some thoughts on iQIYI stock.

I want to start with a daily chart of IQ, because that’s what all the fuss is about. I’ll get to the company behind the chart in a minute.

Since its debut three months ago, iQIYI stock has been one of the market's top performers. Can it last?

There isn’t a lot of history here, as iQIYI stock hasn’t even been trading for three months yet. The stock only picked up its 50-day moving average on June 8.

But a rally like the one IQ has staged from 16 on May 7 to 45 today (which is a gain of over 175% in just 30 trading days) can also cause severe approach/avoidance conflict in investors.

Yes, the stock’s advance since May 21 has only had five down days. Yes, trading volume during the advance has increased markedly (from 6.7 million on May 21 to 62 million on June 15). And yes, the stock went up again on Tuesday despite a general pullback in both developed and emerging market indexes as investors fret about the incipient trade war between the U.S. and China.

But while aggressive growth investors see all of these things as positives, those with slightly more cautious natures probably look at iQIYI stock and see only a lost opportunity and an irrational sprint higher that they wouldn’t dream of touching.

How to Play iQIYI Stock Now

What to do?

Well, I recommended that my subscribers buy a half a position in IQ in the middle of May when the stock was trading at 20. IQ had just completed a mild four-day correction that brought it down from 22 to 20. I liked the company’s business plan of offering high-quality videos, including live broadcasts, games, a social platform and original content. I liked the company’s Q1 earnings results that featured 60%-plus gains in both revenue and earnings. And I admired the company’s aspiration to become “the Netflix of China.”

But more than anything, I liked the company’s association with its parent company, Baidu (BIDU). The Baidu connection gives iQIYI instant access to one of the largest digital networks in China—the list of people who use Baidu’s search engine, which is the dominant name in Chinese online searching. Baidu also provides deep pockets for the production of original content (iQIYI pocketed more than $2 billion in its spin-off IPO, but production is expensive).

iQIYI isn’t profitable yet, and isn’t expected to be until 2020. It takes a lot of money to build market share. But the Chinese online market for entertainment content is vast, which puts the company in a great position for protracted growth, especially if the company’s top brass can stay in tune with China’s viewing public.

The bottom line is that everyone (me included) knows that iQIYI stock can’t continue to kite higher indefinitely. The appropriate cliché is “trees don’t grow to the sky.”

But I’m also not crazy enough to think that I know exactly when IQ stock will start to correct or how low it will go when it does.

IQ Still a Buy ... For Now

I still have a Buy recommendation on IQ because the stock is going up. But I also advise taking a smaller-than-usual position in the stock, at least until you get a profit cushion of at least 10%.

When IQ finally rolls over into a correction, I will tell my subscribers immediately and tell them when to stop buying and when to sell. That’s one of the advantages to being a subscriber to Cabot Global Stocks Explorer. But you can do a lot to protect yourself if you already own the stock.

Consider setting a mental stop based on either your buy price or some recent support level (admittedly hard to find on a straight-up chart like IQ’s). You can decide to sell if the market takes away half of your profit in the stock. Or you can trail a stop at 10% to 20% below its most recent high.

But don’t underestimate the power of momentum. As a recent IPO, IQ still doesn’t have a ton of institutional investors on board, which means there’s a lot of buying power out there that isn’t yet in the stock. And it’s the institutional investors that really control major moves in stocks.

Is IQ too hot to buy? I have never had a good answer to that question, because certain stocks (like TAL Education (TAL), a stock that’s up about 400% from where I first recommended it) can keep advancing long after you think they ought to roll over. But there is a clue in the recent volume, which has shrunk even as the stock has hit new highs. It’s saying that buying power is waning, and that’s a clue that a correction is likely.

To get the list of all stocks I recommend in Cabot Global Stocks Explorer, click here.


Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.