Bank of America loves this under-the-radar streaming stock out of China, sees 30% gain

Published Thu, Mar 2 20233:04 PM EST

There's plenty of upside for one streaming stock out of China, according to Bank of America. Analyst Lei Zhang upgraded U.S.-traded shares of iQIYI to buy from neutral, saying the Chinese online video platform backed by Baidu has an edge because of a strong library of in-house content. iQIYI offers Chinese, Korean and Thai dramas, as well as variety shows and movies. "IQ's strategy to focus on in-house content with higher quality control and lower production costs continues to benefit its subscription growth and ROI. It delivered several hit content across different genres in 2022 and YTD 2023, with improving mix of long-term members and better user engagement," the analyst wrote in a Thursday note to clients. IQ 1D mountain 1-day chart iQIYI shares are up more than 30% in 2023, following a 16% gain last year. Regardless, the analyst's $9 price objective, raised from $4.70, means shares can rise more than 30% from Wednesday's close of $6.85. The stock advanced 7% during Thursday trading. The analyst forecasted further upside to 2023 and 2024 earnings estimates after the firm's profit growth in the second half of 2022, according to the note. With its in-house content strategy, iQIYI is differentiating itself from peers such as Tencent Video and Youku Video, which are focusing on strategies based big intellectual properties and scale, respectively, according to the note. What's more, the firm is expected to ramp up the level of in-house production. In-house production as a percentage of iQIYI's content grew to more than 50% in 2022, and that mix is expected to reach 60% to 70% over the long term, the analyst said. "In-house production helps to reduce content cost, with total content cost declining from 84% of revenue in 2018 to 70% level in 2019-21 and further down to 57% in 2022. We expect content cost to come down to ~50% by 2024," the analyst wrote. "Meanwhile, subscription business and content quality benefit from high-quality in-house production. IQ is able to produce hit dramas across different genres and deliver increasing number of hit in-house content over the past several years," the note continued. Specifically, the analyst called out the success of the "Punch Out" drama series. —CNBC's Michael Bloom contributed to this report.