iQIYI

Iqiyi's second-quarter revenue fell 5% year on year, even as its short-form drama market share doubled to 50% between March and June and reached number one for the first time. Operating loss widened and non-GAAP earnings swung to a loss. Shares fell 10% in US trading on Aug. 18.

Why it matters: The quarter shows the firm's pivot toward short-form drama is not delivering returns despite winning market share. Not enough users are paying up for content. This is the concern we flagged in early 2025 when the firm announced its short-drama push. In our view, the strategy is not working because by positioning as a short-form provider, Iqiyi takes on Douyin, Kuaishou, and Video Accounts head-on. Each has a much larger user base and stronger suite of monetization tools than Iqiyi can match. The firm's latest doubling down on artificial intelligence-generated content would play out similarly. The likely outcome, in our view, is Iqiyi further losing its appeal with long-form drama viewers while its increasingly AI-created catalog fails to differentiate itself from competitors, sending users to larger platforms.

The bottom line: We maintain our fair value estimate of $0.50 for no-moat Iqiyi. Shares remain overvalued, trading at more than 2 times our valuation. The current share price implies a rapid return to profitability that the latest results do not support. For us to change our view, we would need to see the firm start to increase either subscription or advertising revenue, as evidence it can monetize its short-form video or AI-generated content.

Between the lines: Iqiyi carries net debt that its negative earnings cannot repay. The market has assumed Baidu would step in at any refinancing, but Baidu's own cash flow has turned deeply negative on AI spending, making that backstop less reliable.

Our fair value estimate for Iqiyi is $0.50 per share, based on a projected revenue decline of 2% CAGR over the next decade, driven primarily by user attrition to competing platforms such as Tencent Video, Douyin, and Kuaishou.

Below the top line, the most significant valuation driver is content costs, which are largely captured within cost of revenue. This line item has fallen from roughly 90% of revenue in 2021 to 79% in 2025, reflecting disciplined cost management in recent years. We expect this trend to stabilize, with cost of revenue settling at approximately 77% over the long term. Combined with some operating leverage in selling, general, and administrative, we forecast a midcycle operating margin of around 7%, up from 1% in 2025 and 6% in 2024.

All in, we estimate Iqiyi will generate an average of CNY 600 million in annual free cash flow over the next decade. That said, this figure is highly sensitive to the pace of content investment. A meaningful step-up in original content spending could materially compress free cash flow, while tighter cost discipline could push it above our forecast.

We assign Iqiyi a Morningstar Economic Moat Rating of none. While there is a high demand for video consumption in China, Iqiyi lacks the scale necessary to invest heavily in quality content. While Iqiyi is majority-owned by Baidu, China's largest search engine, Baidu's ability to support the platform is limited. Baidu itself is facing challenges, including declining market share in search and a need to prioritize investments in autonomous driving and artificial intelligence. As a result, Baidu has both limited traffic to funnel toward Iqiyi and limited financial flexibility to alleviate Iqiyi’s ongoing struggles, leaving the platform to contend with intensifying competition and hefty content costs largely on its own.

The platform faces intense competition from Tencent Video, which has overtaken Iqiyi as the largest video-on-demand, or VOD, platform by subscriber count, and from the growing dominance of short-form video platforms like Douyin and Kuaishou. Iqiyi’s lack of an economic moat is evident in its inability to generate ROIC above WACC for nearly a decade. Having lost its early-mover advantage, the company remains stuck in a vicious cycle—fewer subscribers reduce its ability to invest in content, which in turn makes it harder to attract and retain users.

Despite being one of the pioneers in China’s VOD market with original content, Iqiyi has failed to build a reservoir of evergreen franchises that are crucial for retaining long-term subscribers. This is partly due to China’s strict film regulations, which limit content diversity by requiring the avoidance of political or socially sensitive topics. Additionally, piracy remains a significant challenge, especially for long-form content, as the longer viewing times justify the effort of finding pirated versions. As a result, Chinese audiences are less willing to pay for video subscriptions, depriving Iqiyi of the resources needed to develop high-quality, franchise-worthy content akin to Disney or Netflix.

This lack of evergreen content has constrained subscriber growth. Over the past four years, Iqiyi’s subscriber base has remained flat at around 100 million, based on our estimates, with occasional spikes driven by hit shows. For instance, the blockbuster series "The Knockout" boosted subscriptions to 129 million in the first quarter of 2023, but subscribers quickly canceled after the show ended, dropping back to 100 million in subsequent quarters. This highlights Iqiyi’s difficulty retaining users without consistent, high-quality content.

Meanwhile, competition in the VOD space has intensified, with Tencent Video emerging as a more advantaged competitor. Tencent leverages its extensive ecosystem by using WeChat to attract users and bundling memberships with Tencent Music and Tencent Sports to enhance its subscription appeal. Additionally, Tencent Video benefits from exclusive access to literary IP from China Literature, a Tencent subsidiary, ensuring a steady pipeline of original content for adaptation. By contrast, Iqiyi lacks these ecosystem synergies and exclusive IP access, leaving it increasingly vulnerable to competition.

Beyond traditional VOD, Iqiyi faces rising competition from short-form video platforms like Douyin, Kuaishou, and Tencent’s Video Accounts. Currently, short-form content commands over 36% of Chinese internet users’ total online time, while long-form video engagement has shrunk to a declining single-digit share. This structural shift in consumer behavior is rooted in China’s fast-paced lifestyle, fragmented time schedules, and the widespread use of smartphones as the primary device for content consumption, rather than TVs. These entrenched habits are unlikely to shift in the next decade, making it difficult for Iqiyi to compete for user time.

Adding to these challenges, Iqiyi has a history of significant financial losses and a substantial debt burden. Although the company began reporting operating profits in early 2022, they were achieved by cutting back on content spending, which could jeopardize the future content pipeline. Given the multiyear development cycles required for premium productions, the deferred cost of this underinvestment has now surfaced, reflected in consecutive revenue declines across 2024 and 2025 and a severe compression of operating margins to near breakeven. Looking ahead, if subscriber churn accelerates, Iqiyi will be forced to aggressively reinvest in its content pipeline, risking a return to structural unprofitability.

Recent profitability indicates that Iqiyi may have turned a corner, demonstrating its ability to maintain profitability even amid slow membership growth.

Iqiyi remains one of the top players in the video-on-demand industry by subscriber count and could potentially benefit from market consolidation.

The company has experienced brief success with blockbuster dramas in the past and may be able to replicate this blueprint over the long term.

A lack of differentiation in platform content, combined with the saturation of the video streaming market, could impede Iqiyi's growth efforts.

Chinese regulators can impose stricter content rules on movies and shows, compelling Iqiyi to operate within restricted narrative choices.

There remains the possibility of highly competitive global internet service providers re-entering China over the next 10 years.