Investors Aren't Buying iQIYI, Inc.'s (NASDAQ:IQ) Revenues
iQIYI, Inc.'s (NASDAQ:IQ) price-to-sales (or "P/S") ratio of 0.5x might make it look like a buy right now compared to the Entertainment industry in the United States, where around half of the companies have P/S ratios above 1.6x and even P/S above 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
See our latest analysis for iQIYI
What Does iQIYI's P/S Mean For Shareholders?
While the industry has experienced revenue growth lately, iQIYI's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on iQIYI.What Are Revenue Growth Metrics Telling Us About The Low P/S?
In order to justify its P/S ratio, iQIYI would need to produce sluggish growth that's trailing the industry.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. The last three years don't look nice either as the company has shrunk revenue by 5.8% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 2.2% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 13% per year, which is noticeably more attractive.
With this information, we can see why iQIYI is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Final Word
Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of iQIYI's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for iQIYI with six simple checks will allow you to discover any risks that could be an issue.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.