Iqiyi’s tragic long march | domeet webmaster

Article from WeChat public account:Linzhi (ID:linzhiplan), author: Front, front cover from the visual China

Aiqiyi, which has been losing money for ten years, is welcoming a key turning point on its long march: the trend of net increase in paying users shows that in the next few years, it may reach less than 200 million paid users, by the scale of paying users. The big logic to increase revenue growth and ultimately profitability is about to face challenges. It needs new stories to guide market expectations and stabilize its market capitalization.

Before Iqiyi has hematopoietic function, it still needs 2-3 times of financing with a total scale of more than 10 billion yuan. If its market value declines sharply due to the expected adjustment in the size of paying users, the cost of financing will be huge. The most “highlight” moment since the creation of iQiyi is also entering the most difficult roads.

01 First Aiqi Art

Iqiyi and Tencent Video are the largest online video playback platforms in China: about 600 million users will open the Iqiyi APP every month to watch videos.

Aiqiyi is the crystallization of the long-term belief in capital and the continuous entrepreneurial spirit of the team. It is built with the capital of watering and the cultivation of the entrepreneurial team.User barriers, but breakeven seems to be out of reach: in the past 10 years, operating losses totaled nearly 30 billion yuan (estimate), 2017, The operating losses in 2018 were as high as 3.95 billion and 8.3 billion respectively, and the expected losses in 2019 were nearly 10 billion.

Why do you have a market value of nearly 100 billion yuan? What kind of business vision is supporting capital to continue to invest in an asset that has not been profitable for more than a decade?

Since the listing of iQiyi, the market value peak once exceeded 200 billion, but it has continued to hover below 100 billion yuan. What challenges does short-cycle operation encounter? What adjustments have the market expected to undergo? Will the pessimistic trend continue?

From the perspective of the crossing cycle, how much upward appeal can iQiyi’s business vision be if it can be realized?

This article attempts to answer this set of key questions from an expected data perspective. Before the core logic is gradually developed, we first need to establish four basic cognitions under the investment vision.

(1) iQiyi is one of the top ten applications in China’s mobile Internet market

(Data Source: iResearch)

According to iResearch, in addition to iQiyi, the top ten APP applications in the Chinese market have a very impressive profit scale. Tencent’s WeChat, QQ, Tencent video, Ali’s Alipay, Taobao, Gaode map Two companies with a market capitalization of more than one billion have won six places. The main shareholder of iQiyi is Baidu. Iqiyi is also the only one in the list that is split and independently listed, and has a unique appeal to capital.

(2) The three kingdoms in the video field are being interpreted as two strong hegemons

(Source: iRe)

Tencent Video, Youku, and iQiyi are the three core players of the online video aggregation platform. In 2018, the pattern of “three-nation killing” has undergone major changes: Ali’s subordinates are cool, and the short video field has risen.

Aiqiyi and Tencent video almost presented a similar monthly user curve, the value is stable at around 600 million, but the growth trend has stopped. Youku has recovered slightly after being left behind. However, the pattern has been difficult to change easily.

The rise of the vibrato has partially eroded the user length of the long video platform, but the demand logic of short video and long video is not exactly the same. In the long run, the long video representing professional production is the more sustained user demand. It is unlikely that the vibrato will pose a real challenge to the long-term user scale of iQiyi and Tencent video. At the same time, the long video platform is also adding short video content to moderate defense. In the long run, the video field will have a long-term trend of long video as the core and long and short video.

(3) iQiyi and Tencent video content spending soared “to penetrate” users

(2019, 2020 net increase in user data is the original expected data, the actual data is lower than this scale – note)

2016-2018, is the three years of video platform outsourcing copyright cost soaring, Tencent and iQiyi almost jointly bought the vast majority of copyrights that the entire industry can buy, and established a platform for users. Recognize the need for all film and television dramas. The cost of outsourcing copyright for iQiyi has risen from nearly 5 billion to more than 15 billion. Since 2019, outsourcing copyright costs have peaked, and the growth rate has dropped significantly to a low level, which is expected to be related to industry growth in the future.

In 2017, self-made content expenditures soared. Tencent Video and iQiyi both built unique advantages in hot-selling dramas and variety shows. Self-made content became a key strategy for platform differentiation competition. The cost of self-made content of iQiyi has almost tripled from 1.6 billion to nearly 5 billion in 2019. It is expected to continue to increase related investment in 2020.

In essence, content spending leads the industry to “extraordinary” to a very high level in advance, driven by the most efficient competition for users. iQiyi and Tencent Video will push the monthly users to 600 million, and the potential competitors will be left behind at the same time. At the same time, the number of paying users will increase rapidly. Recently, the scale of paying users of the two platforms has exceeded 100 million.

(4) Extremely high content expenditures result in comprehensive revenues that are significantly lower than the combined costs

In 2018, Iqiyi’s operating loss was 8.3 billion yuan, twice the amount of losses in 2017. The figure below shows that the cost of content of more than 20 billion is the core reason why comprehensive revenue is significantly lower than the comprehensive cost.

Aiqiyi’s revenue comes from four aspects:

Member subscription revenue: 20,000 paid members in 2018, ARPPU(single user monthly payment amount) is 12.8 yuan, 80 million * 12.8 yuan * 12 months, the value is 12.288 billion yuan, due to the growth of paid members, late net Increased customers did not contribute revenue in the previous months, so the real value of 10.62 billion yuan is lower than the simple calculation amount;

Ad revenue: iQiyi distributes branded ads to video users, The overall impact of the Internet advertising market, on the other hand, is influenced by the investment budget of brand advertisers. In general, brand-based advertising is an advertising category with low growth potential and high macro-cycle impact in online advertising. Negative growth;

Content distribution revenue: mainly from the resale revenue of purchased video rights to other video platforms, Overall, it has a correlation with the annual content cost, which is about 11%-15% of the content cost;

Games and other income: similar to the traffic pool realizing income, by games, live, literature, electricity Business composition, low visibility;

From the perspective of revenue sources, there is no bright spot in the advertising business that currently accounts for half of the revenue. Content distribution revenue is essentially a kind of apportionment mechanism for high content cost, while games and other incomes are used as small-scale realizable businesses with large flows. It does not support high traffic acquisition costs.

The long-term growth prospects of the member-subscription business alone are to support the continued investment of capital.Power source.

02 Long-term belief in capital

Video entertainment is becoming a must-have for home entertainment. Compared with online education and knowledge payment, video has a high repurchase rate and is sustainable. Necessities must have an excellent investment value.

In the 1990s, when cable TV, including local channels, entered thousands of households, each household was priced at 8-16 yuan/month, and between 100 and 200 yuan for the whole year. In 2019, the price of each cable TV in Shanghai was 23 yuan/month, 276 yuan/year. At present, the price of iQiyi and Tencent video is 15 yuan/month, 180 yuan/year, taking into account the preferential activities, the actual price is 13 yuan / month, 156 yuan / year.

Compared with cable TV channels, online video platforms have certain disadvantages in real-time news and some program launches due to regulatory, industry development and market competition factors. However, the online video platform has significantly reduced the amount of advertising, and the amount of content resources has increased significantly. Compared with the fixed-time broadcast of cable TV, users can choose to play time, pause or review more freely. iQiyi and Tencent video provide great convenience for user experience.

In summary, the membership pricing of online video platforms is significantly lower. The current market pricing and subscriber size are significantly lower than the corresponding values in the market maturity period, which is the fundamental driving force for the capital to continue to invest in iQiyi.

Quantitatively, the long-term belief in capital consists of the following set of data expectations:

China has 4.2-450 million households, long-term, online video platform users and total households Quantity related. Assuming that the total number of valid subscriptions in the future is between 3.5 and 400 million, considering the situation of repeated subscriptions, Tencent Video and iQiyi are likely to achieve a scale of 200 million paid users. In 2019, the number of subscribers on both platforms has been Over 100 million;

Conservative estimates, the future ARPPU value will be 16-20 yuan / month, corresponding to the annual 192 yuan -240 yuan, this conservative estimate is still lower than Pricing of cable digital TV in 2019;

Based on the above two points, the conservative estimated subscription business income is between 350-480 billion yuan. Between, this has far exceeded the current 20 billion yuan / year of content expenditure, even if the future copyright and self-made drama continue to increase investment, the subscription business itself has the ability to create 10 to 15 billion operating profit, assuming advertising and other business Can contribute 5-10 billion yuan of profits, then, iQiyi’s long-term profit creation capacity will reach 15-25 billion, corresponding to the valuation range of 200 billion to 400 billion, compared to the current market value of less than 100 billion, the investment income is quite Good;

IQIYI subscription business has excellent performance resilience: the margin of each additional user The cost is extremely low, and the increase in ARPPU value is almost directly accounted for before tax. These two characteristics determine its ability to improve the consensus of profit expectations. In simple terms, with a 16 yuan/month ARPPU calculation, each net increase of 10 million subscribers will contribute more than 1.5 billion operating profit; for 200 million subscribers, ARPPU will increase operating profit by 2 billion for every 1 yuan price increase;

Optimistic outlook, if the consumption power of the Chinese market continues to grow steadily, the next decade, the annual ARPPU Expected to double, close to 300 yuan, to 200 millionRoughly estimated, iQiyi’s overall revenue and profitability will be close to 100 billion and 50 billion yuan respectively (considering all business such as advertising, games, etc.) Span>, it may eventually become a trillion-dollar entertainment behemoth, corresponding to the current ten times space.

In summary, the long-term belief in the value of capital to the value of iQiyi is basically determined by the total number of paid users and the two key variables of ARPPU. The long-term growth story of iQiyi is both concise and clear. The basic value and performance flexibility set a fairly good investment income range for long-term capital. This may be the investment of “Think Big, Think Long” by Gaochun Capital. The 1 billion US dollars of heavy warehouse Aiqiyi’s confidence.

Every iQiyi long-term investor has such a profitable long-term chart. Iqiyi should usher in a turning point in sharply reducing losses in 2020. This is the first time since Iqiyi was established in 2010. The end of the 10-year Long March is also the starting point for opening the profit cycle for the next 10 years.

However, the real business process is far from the imaginary beauty, and iQiyi is welcoming the greatest test of capital beliefs.

03 Chinese version of Naifei’s helplessness

Aiqiyi was labelled “China’s Neifei” at the beginning of its listing. The market value of Netflix, the largest online video platform in the United States, is ten times that of iQiYi. The difference between Netflix and iQiyi is that its main business income is almost entirely from customer subscriptions, while iQiyi has a slightly more complex main business composition.

Long-term experience conflicts between advertising and paid subscriptions

There is a long-term experience conflict between the video platform advertising business and the user’s paid subscription. In essence, users are more resentful of video ads than e-commerce, information flow, and search ads because it delays or interrupts the user’s video experience. Every paying user will ask: “Since I paid the fee, why should I advertise to me?” iQiyi must seek a delicate balance between advertising content and user experience, and weaken the subscription with a beautiful and appropriate advertising style. The negative sentiment of the customer, which objectively limits the types of ads and advertisers that video ads can undertake. Fundamentally, video ads do not have the potential for unexpected growth.

Tencent video, iQiyi and other Chinese video platforms are advertising to paying customers. It is not a “smart realization” in commercial design, but a helpless move. In the current stage and in the expected future years, there is a very large “gap” in the revenue-to-cost generated by subscriber subscription services, which must establish a diversified revenue mechanism, including advertising, to cover costs.

In other words, when the paid subscription revenue is about to exceed the content expenditure, the competitor can gain more users’ feelings by weakening the advertising category, thereby increasing the size of the paying customers. From the perspective of the game, Tencent Video has a greater initiative, and iQiyi can only be forced to follow up. Long-term investors may overestimate the ability of the advertising business to create profits in the future.

Aiqiyi continues to face price increases

Compared with Netflix, the domestic video platform is in the Tencent iQiyi double hegemonyYouku is still looking forward to counterattack, and Ai Tengyou is not willing to raise prices first. Tencent Video and Youku are backed by Tencent and Ali. There is still a “big kill” in business synergy to enhance user rights. Iqiyi lives in this area. Disadvantages.

In terms of competition logic, Tencent Video can compete with iQiyi for a longer period of time by delaying price increases and increasing related rights. Naifei and Iqiyi are different, and their adjustment to user pricing is active. The chart below shows that when the growth rate of domestic subscribers in the United States is reduced, Netflix can increase the revenue and profits by relatively independent price increases.

Aiqiyi lacks international ability

Neifei is a typical international expansion company with an international subscription customer base that is 1.5 times larger than its domestic subscription customers and will continue to play a central role in driving the scale of paying subscribers. The ceiling of iQiyi is obviously much smaller. In the long run, the size of iQiyi’s domestic subscription customers is expected to be smaller than that of Netflix’s international subscription customers.

Overall, iQiyi and Naifei face different operating environments and their revenue composition is different. Compared with Naifei, the ceiling of iQiyi is obviously much lower.

A lot of research will simply prove that iQiyi is underestimated by comparing P/S(market value/sales revenue). In fact, iQiyiThe “S” composition is not the same as that of Naifei. The growth prospects of the two companies are also different. The simple comparison of the P/S indicators does not make much sense.

04 Fragile balance

Iqiyiyi is also experiencing the “two-year itch” of the IPO, in the sixth quarter after the listing (2019Q2), comprehensive The growth rate of revenue has rapidly declined from a high growth rate of 35% to 45% to a medium-speed growth zone of 15.2%. The advertising business was affected by the overall environment. It stopped growing in Q3 in 2018. In 2019, Q2 even had a negative growth of -15.9%.

Aiqiyi’s future profit forecast is essentially the expectation that member subscription business will continue to grow: Member subscription business revenue growth continues to be faster than content cost growth, making comprehensive revenue gradually exceed comprehensive costs. Enter the profit range.

In the long run, this balance of income and cost is based on low- and medium-speed growth scenarios and is very fragile. Whether it is a stagnant growth from subscription membership or a delay in price increases from ARPPU, it will affect the break-even point and profitability outlook. Especially when the pressure on the growth of paying members is stagnant, iQiyi must manage the cost of content more carefully to prevent the expansion of losses, which will almost be a decade of iQiyi.The most difficult time on the road to profitability.

05 Fatal confusion

The upcoming Q3 quarterly report will tell the market: iQiyi’s quarterly net increase in the number of paying users will be significantly lower than expected. The original expected value is between 5.5 million and 7.5 million, and the actual value may be less than 4.5 million. In the previous quarter (2019Q2), iQiyi only achieved a net increase of 3.7 million paying users, which is the lowest value since listing, and the capital market is temporarily I have accepted the interpretation of Iqiyi’s strict regulation.

This will be the second financial quarter that is significantly less than expected. In the end, the market will find that the number of new paying users of iQiyi may barely be 20 million in 2019. At the end of 2018, the market believes that this year will be Increase the number of new paying users by about 35 million.

The new short-term impact of paying users is less than expected, and the operating losses have been passively expanded in the context of content spending still maintaining the original rhythm. For the whole year of 2019, iQiyi’s operating loss may be close to 10 billion (formerly expected to be around 8 billion), the loss will be created The new high since.

In fact, the market expectationWhat is most influential is not the short-term losses, but the fatal confusion about the size of paying users in the next few years. If iQiyi’s ceiling for paying users in the next few years is not around 200 million, but about 150 million, then the impact on earnings will be huge:

(1) The expectation of a substantial reduction in losses in 2020-2021 and the approach or profitability in 2022 will delay the overall performance;

(2) Due to the difference in the size of paying users, there will be a gap of expected revenue scale of 10-15 billion, and the scale of profitability in the investment cycle that iQiyi can look forward to will be significantly adjusted;

With the following three assumptions, we can see the huge impact of the size of paying users on iQiyi’s long-term profitability outlook:

Contemplative hypothesis: Assume that Aiqiyi’s final monthly ARPPU value is 16 yuan, and iQiyi’s final paid user size is around 150 million yuan;

Neutral hypothesis: The monthly ARPPU value is the same as the pessimistic assumption, and the paid user size is about 200 million;

Positive optimistic assumption: The final paying user size is the same as the neutral hypothesis, and the monthly ARPPU value is about 17 yuan;

We see that the impact of the size of paid users is much greater than the impact of ARPPU. The question of the size of the long-term paying users in the capital market will be a fatal question about the value of iQiyi capital.

In the face of the increasingly weak net increase in paying users, would you believe that AI ART will turn around in 2020?

06 must return to long-term faith

For short- and medium-term investors, iQiyi is a stock that is expected to show dramatic changes, and the expected swing brings the market level to volatility within the annual range.

Long-term investors have been blocking the decline of the market value of iQiyi, but when long-term beliefs begin to face the pessimistic challenges of commercial reality, the long-term capital will also face a real test.

The value perception of iQiyi will eventually return to long-term belief: with the continuous growth of the economy, the scale of domestic paid users will gradually climb to more than 200 million, and the annual payment amount per user will exceed 250 yuan. Iqiyi will continue to operate along this path, and will eventually usher in a glorious era of more than 20 billion profits. However, Iqiyi’s profitable long march is longer than expected.

For smart investors, if you find the bottom of pessimistic expectations, it also means finding another great investment point on the road of iQiyi’s tragic long march.

I wish you good luck and good luck to value investors!

Article from WeChat public account:Linzhi (ID:linzhiplan), author: Front