In this segment ofMotley Fool Money, host Chris Hill is joined by senior analysts Jason Moser, Matt Argersinger, and Ron Gross to reflect on a smart move by video-streaming specialistiQiyi(NASDAQ:IQ). It sealed a deal late last month that links its VIP membership program to that of e-tailer JD.com(NASDAQ:JD). It looks like Chinese consumers like the prospect of paying one for the benefits of both.
The Fools discuss its performance since its recent IPO, and speculate about how its growth arc will look. They then turn to another recently public online business: Dropbox. It beat on the top line, the bottom line, and guidance. So why was the market unimpressed with its earnings report? The Fools have a few educated guesses, and they explain what worries them about the company’s prospects.
A full transcript follows the video.
This video was recorded on May 11, 2018.
Chris Hill: Shares of iQiyi, the Netflix of China, got a boost this week when the company announced that its new partnership with JD.com is already paying off. What’s the story, Matty?
Matt Argersinger: They just signed this at the end of April, this partnership with JD.com, which is the second-largest e-commerce company in China. They merged together their JD Plus program, which is their Prime kind of program, and iQiyi’s membership program, and iQiyi has already added one million subscribers in about a week’s time since signing that deal. So, you can see how that’s paying off. They ended March with 61 million subscribers. I really think, by the end of 2019, the end of next year, iQiyi itself could have over 100 million paying members.
Hill: I was going to say, this is a company we talked about before it went public. You were as excited about the prospects of this company as any company I’ve seen coming into the market. How do you think they’ve been doing? Obviously, early days, in terms of being a public company. But, how do you think they’re handling it so far?
Argersinger: Well, nothing but good news so far. They had great first quarter results, showing, I think it was 57% growth in year over year revenue in the membership business, which I think is going to be the key business going forward. The question is, can they maintain that leadership in online video that they have right now in China? And I think partnerships like the one they have with JD are going to be pivotal to that. They have a licensing deal with Netflix. And, by the way, Golden Slacks [Goldman Sachs] gave them a buy rating this week and a $23 price target, so that doesn’t hurt the stock.
Hill: Dropbox, the cloud storage company, out with its first quarterly report as a public company. Profits, revenue and guidance all came in higher than Wall Street was expecting. Jason, it just wasn’t good enough.
Jason Moser: No idea how to follow up the Golden Slacks reference. [laughs] Listen, I said when Dropbox went public — we were talking about this a quarter ago, when it went public –that I just didn’t want to have any part of it. And I stand by that. It could be a decent business, maybe, in time. And they turned in a respectable quarter. Top line was up 28%. Still not profitable, of course. Paying users of 11.5 million, compared to 9.3 million a year ago. That’s good, too. When we look at their paying users as a percentage of overall users, it’s still so tiny, it’s like 2%.
So, you have a business here with slowing revenue growth. Paying users is such a small part of the total base. There’s no real competitive advantage. And the market is paying somewhere around 11-12X sales for a business like this. If you’re going to pay that kind of a multiple, they need to be growing faster than they are. So, I suspect, we’ll probably see this stock pull back some more here in the coming year. And maybe there’s a point where it becomes a little bit more interesting, but not right now.
Hill: I understand why they went public. I understand the rationale there. But I was skeptical because they’re wading into a forest filled with giants, when you think about all of the massive tech companies that are doing cloud storage. It really seems hard for any upstart company to get any sort of toehold.
Moser: I think that’s the right observation. When you look at this space and you look at companies like Microsoft, Alphabet, Amazon all doing that same kind of stuff — and, to be clear, Dropbox uses Amazon’s cloud storage for part of their infrastructure. You just have to see something really special there, and I just don’t see it with them yet.