iQIYI (IQ) Report Interpretation

Overview

UBS reviews iQIYI following a slight 2Q26 revenue and operating-profit miss and a softer 3Q outlook. It retains Buy because it expects a gradual improvement in content economics from a more decentralized content model and broader AI adoption, even as near-term revenue pressure drives estimate and target-price cuts.

Core views

iQIYI's core business remained weak in 2Q26. Revenue declined 5% year on year, 1% below consensus, while the adjusted operating loss narrowed to Rmb30m but remained modestly below breakeven expectations. Management was cautious on the 3Q revenue outlook, and UBS expects total revenue to decline 8% year on year, compared with the 5% decline in 2Q. UBS lowered its 3Q membership-revenue forecast to flat quarter on quarter, or down 5% year on year, because users continue to shift consumption toward short-form content. Advertising trends were relatively more resilient. Advertising revenue fell 2% year on year in 2Q, an improvement from earlier declines, as performance advertising returned to positive growth on demand from AI applications, instant retail and e-commerce. UBS nevertheless keeps a measured 3Q advertising-revenue growth forecast of 3% year on year, insufficient to offset pressure in membership and other revenue streams. The report's central longer-term thesis is that profitability can improve despite subdued revenue through lower content costs. Management points to a more decentralized, revenue-sharing content model; a mix shift toward mid- and short-form dramas and internet feature films, with fewer long-form drama projects and episodes; and broader AI use in production. UBS expects these changes to reduce content costs gradually. Management reports that AI adoption in short and animated dramas and internet feature films can cut production costs and timelines by 70%-90%; iQIYI has launched 16 AI-generated short dramas year to date and plans a broader AIGC pipeline next year. UBS argues that these efficiencies could structurally improve profitability and cash flow. Overseas operations are a relative bright spot: membership revenue grew 40% year on year in 2Q and the segment was profitable. iQIYI plans to prioritize profitability in mature markets such as Thailand while seeking high revenue growth in higher-potential markets with disciplined investment. Reflecting the weaker revenue trajectory and high operating leverage, UBS lowered its 3Q and 2026 revenue estimates by 9% and 6%, respectively, now forecasting revenue declines of 8% and 9% year on year. It cuts expected adjusted operating profit to roughly breakeven in 3Q and Rmb53m in 2026. The revised EPS forecasts are negative Rmb0.30 for 2026E, Rmb0.46 for 2027E and Rmb1.01 for 2028E; the latter two are reduced 40% and 11% from prior estimates. UBS maintains Buy but cuts its DCF-based price target to US$1.55 from US$1.82, using a 9.4% WACC. The target implies 23x and 10x 2027E and 2028E P/E, respectively. Potential earnings bottoming, progress toward a Hong Kong listing and continued AI execution are identified as possible catalysts.

Analysis framework

UBS starts with the quarterly revenue and operating-profit outcome, then updates near-term membership and advertising assumptions. It links the revised revenue outlook to operating leverage and assesses whether changes in content mix, decentralized revenue sharing and AI production tools can lower content costs over time. The price target is derived using discounted cash flow analysis and is cross-checked against implied forward P/E multiples.

Methodology notes

• Valuation methodsDCF (Discounted Cash Flow)

  Discounted cash flow valuation

  UBS discounts projected future cash flows using a 9.4% WACC to derive its US$1.55 price target; weaker earnings assumptions reduce the valuation.

• Industry AnalysisVolume-price decomposition

  Revenue decomposition by membership, advertising, content distribution and other revenue

  The report separates revenue streams to show that membership weakness is the main near-term drag while advertising demand partially improves.

• Corporate Fundamentals and FinanceOperating and Financial Leverage Analysis

  Operating leverage under subdued revenue trends

  UBS explains that lower revenue materially affects operating profit, while future content-cost reductions could support margin recovery.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• iQIYI (IQ.O / IQ)

  Primary covered company; UBS maintains Buy while reducing estimates and the target price.

  Strengths

  Profitable overseas membership business, advertising stabilization, and potential AI-led reductions in content costs and production cycles.

  Weaknesses

  Core revenue remains subdued, with membership revenue pressured by users shifting to short-form content.

  Comparison

  iQIYI had a 31% average MAU share in 2024, neck-to-neck with Tencent Video and ahead of Mango and Youku, according to QuestMobile.

  Risks

  Tighter regulation, weaker Chinese economic conditions affecting advertising, and more intense competition that could require higher content investment.

Key data

• 2Q26 revenue growth-5% YoYRevenue was 1% below consensus.
• 2Q26 adjusted operating profitRmb30m lossLoss narrowed but was modestly below breakeven expectations.
• 3Q26 total revenue forecast-8% YoYVersus a 5% YoY decline in 2Q26.
• 3Q26 membership revenue forecast-5% YoYFlat quarter on quarter, reflecting a shift toward short-form content.
• 3Q26 advertising revenue forecast+3% YoYPerformance advertising benefits from AI applications, instant retail and e-commerce demand.
• AI production impact70%-90% reductionManagement says AI can reduce production costs and timelines in selected formats.
• 2026 adjusted operating profit forecastRmb53mReduced amid high operating leverage and subdued revenue.
• Price targetUS$1.55Cut from US$1.82; DCF-based using a 9.4% WACC.

Impact & implications

UBS sees a near-term trade-off between weakening core revenue and a prospective structural improvement in content economics. The report maintains that execution on AI, content-mix optimization and decentralized revenue sharing could allow earnings and cash flow to recover even without a rapid topline rebound.

Risks

• Tighter regulation could slow subscriber growth and impose further restrictions on content diversification.
• A slower Chinese economy could reduce online advertising revenue growth.
• Intensifying competition could cause iQIYI to increase content investment aggressively.

What to watch

• Whether earnings begin to bottom as content-cost initiatives take effect.
• Progress toward a Hong Kong listing.
• Execution and expansion of AI-generated and AI-assisted content initiatives.