What happened
Week to date, shares of iQiyi (NASDAQ: IQ) were down 14% as of 12:21 p.m. on Friday, according to data provided by S&P Global Market Intelligence.
The stock fell earlier this week after the Chinese video streamer announced a large stock offering, which would dilute existing shareholders. However, one analyst was more upbeat about the upside potential.
So what
On Jan. 17, iQiyi announced an offering of 76.5 million American depositary shares, representing about 10% of its market capitalization (total shares outstanding times the share price). It's normal for the market to discount a stock after new share issuances to account for dilution, but the sell-off might be overdone considering how far the stock fell over the last year.
Morgan Stanley analyst Gary Yu believes it's time that investors reward the company for improving profitability in 2023. While Yu believes the long-term outlook is still uncertain, iQiyi is showing considerable progress in its turnaround effort.
In the last quarter, new releases drove higher net subscriber additions and market share gains. The company's adjusted operating profit margin improved to 7% of revenue compared to a loss of 14% in the year-ago quarter.
Now what
Investing in China is not for the faint of heart. For example, the Chinese government appears to be interested in gaining influence over the entertainment industry in China. Recently, certain entities backed by the Chinese government acquired small stakes in two of Alibaba's (NYSE: BABA) digital media assets. Competition and the ongoing threat of regulation shouldn't be overlooked.
Still, iQiyi's improving financials shouldn't be discounted, either. At a low price-to-sales ratio of 1.09, the stock offers plenty of upside.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.
