We recently compiled a list of the 10 Worst Chinese Stocks to Buy Right Now According to Short Sellers. In this article, we are going to take a look at where iQIYI, Inc. (NASDAQ:IQ) stands against the other communication services stocks.
Between January 2024 to late August 2024, the Chinese equity markets have witnessed a significant rebound. On a YTD basis, the Hang Seng Index saw an increase of over 3%. Both onshore and offshore Chinese equities were able to generate positive returns, with materials and industrial sectors in the positive territory. This growth was seen mainly due to resilience in the broader Chinese economy, with the country’s GDP increasing by 5.3% YoY in 1Q, exceeding market expectations.
However, China’s economy grew much slower than anticipated in 2Q as a protracted property downturn and job insecurity impacted the broader economy. Market experts expect that Beijing might have to unleash even more stimulus measures. China’s economy saw an increase of 4.7% in April-June, the slowest growth since 1Q 2023 and missing a 5.1% estimate by the broader market.
Outlook for Chinese Economy
Earlier in the year, China announced its ambitious goal of reaching 5% economic growth in 2024. The strong growth of new industries together with fresh drivers should continue to help the broader Chinese economy. Experts believe that new avenues of growth are needed for China to see steady growth. This includes expansion in new and transforming industries such as AI, digital financial services, and green technologies such as EVs.
China’s clean energy sector already made up for ~40% of the country’s economic expansion in 2023, reported the World Economic Forum. Meanwhile, spending by private-sector on research and development doubled over the past five years. Experts opine that high-quality growth is required to be rooted in advanced technologies.
Industries related to high-quality growth include generative AI systems, semiconductors, and renewable energies. As per experts, tapping into these sectors, with the required investments, should add to the growth of the broader Chinese economy and equities. Also, maintaining efficient supply chains and gaining access to global markets should help in achieving high-quality growth.
Where Are Chinese Equities Headed for Remainder of 2024?
The valuation of Chinese equities is at low levels as compared to other major markets globally. The valuation of the Hong Kong stock market remains around low levels that were witnessed during previous market turmoil, like the 2008 global financial crisis, the 2011 European debt crisis, and other Black-Swan events. The continuous improvement of economic fundamentals and more supportive measures to address challenges are expected to translate the current low valuations into a sustained rally.
The country’s economic growth over the upcoming 2 years should surpass the global average, including both developed and developing economies. Domestically, the potential ramp-up in government bond issuance is likely to support expanded infrastructure investment in 2H 2024. As per China Asset Management (Hong Kong) Limited’s mid-year outlook, ~70% of the 2024 bond issuance quota is unused. This is even after a strong jump in bond issuance seen in May.
The country’s exports are likely to remain strong in 2H 2024. All these factors should bring stability to the overall economy and result in the recovery of corporate earnings, driving equity markets.
With improvement expected in the Chinese economy, underpinned by supportive policies, the overall risk appetite should increase gradually in 2H 2024. This should result in increased inflows in the equities in 2H 2024.
Therefore, investors might rebalance their portfolios towards both value and growth sectors. China Asset Management (Hong Kong) Limited believes that investors should use state-owned enterprises (SOEs) providing high dividends to build a robust investment foundation, mainly for those having clear competitive edges and operating advantages.
Our methodology
To list the 10 Worst Chinese Stocks to Buy Right Now According to Short Sellers, we used a Finviz screener to filter out the Chinese stocks. Next, we narrowed our list by selecting the stocks having high short interest. Finally, these stocks were ranked in ascending order of their short interest.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An index provider revealing the investment strategy and assets of a company.
iQIYI, Inc. (NASDAQ:IQ)
Short % of Float (8/30/2024): 10.85%
Number of Hedge Fund Holders: 17
iQIYI, Inc. (NASDAQ:IQ) provides video entertainment services. It offers movies, television dramas, variety shows, and other video content.
As of 30th August 2024, its short percentage of float stood at ~10.85%, with short sellers expecting that the company will continue to see headwinds related to its customer growth. Its recent efforts to bolster the content library, both in terms of quantity and quality, demonstrated brief signs of success, but they have not translated to long-term growth. Therefore, iQIYI, Inc. (NASDAQ:IQ) might encounter challenges related to membership growth. Also, the company might see competitive pressures not only from streaming platforms but also from short video and live-streaming mediums. Collectively, these factors continue to raise margin and profitability concerns.
On the other hand, Wall Street analysts believe that iQIYI, Inc. (NASDAQ:IQ) should be able to maintain profitability over the near term as a result of expectations of lower content costs, which are now ~50%-60% of sales. With a focus on innovation and user experience, iQIYI, Inc. (NASDAQ:IQ) continues to implement numerous strategies to beat its competition and tap new market opportunities. The company has been focusing on content diversification in a bid to cater diverse preferences of the audience.
Apart from attracting new users, this should also help in retaining the existing ones. It will translate to increased user engagement and loyalty. Therefore, the company’s extensive content library, advanced technology (such as AI-driven recommendations), and expectations of higher user engagement are expected to act as critical tailwinds, which should help in revenue and earnings growth.
As per Wall Street analysts, the shares of iQIYI, Inc. (NASDAQ:IQ) have an average price target of $3.59. Insider Monkey’s 2Q 2024 revealed that iQIYI, Inc. (NASDAQ:IQ) was in the portfolios of 17 hedge funds.
Overall IQ ranks 7th on our list of the worst Chinese stocks to buy right now according to short sellers. While we acknowledge the potential of IQ as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that’s more promising than the stocks on our list, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.