We recently compiled a list of the 10 Best Value Penny Stocks to Invest in Now. In this article, we are going to take a look at where iQIYI, Inc. (NASDAQ:IQ) stands against the other value penny stocks.
The US market has been resilient over the past years despite higher interest rates, however, recent reports showed a sharp decline in the growth of the U.S. job market. According to reports from the Labor Department, the economy added just 114,000 jobs in July compared to 179,000 in June. This marks a sharp drop in employment generation from 482,000 in January 2023, raising the unemployment rate to 4.3% in July 2024, the highest level in nearly 3 years. The significant slowdown in hiring can potentially make the economy vulnerable to recession and therefore leads to an ease in monetary policy guaranteeing an interest rate cut in September. Economists are calling for a 50 basis point reduction in borrowing costs.
With the current uncertainty in the market and delay in rate cuts, investors are worried about a possible recession. The question is should investors pick penny stocks to diversify their portfolios? Penny stocks, though cheap, are without any doubt risky investments with a high rate of volatility and are even more sensitive to monetary policy changes. A higher interest rate negatively affects stocks’ earnings performance because these stocks are mostly running on debt and, therefore, can benefit from a possible rate cut in September 2024.
Moreover, these stocks are prone to speculative trading and scams, and therefore, are suitable for investors that can do diligent research and have a high tolerance for risk. However, not all stocks are the same and investors may yet benefit from long-term investments in high quality penny stocks with strong fundamentals. Value investing is an investment strategy focused on finding stocks that are being traded for less than their intrinsic or true value. In other words, value stocks are undervalued by the market and can be rewarding long-term investments once the market realizes their true value.
Investing in small-cap penny stocks is no doubt risky owing to their high volatility and low liquidity, however, using the value investing strategy one can generate long-term profits from investing in these stocks.
Investing in Small-cap Stocks in 2024
Most penny stocks have small market caps. Large-cap stocks generally dominate the market outperforming small-caps, and last year was no different as the large-cap stocks beat small-cap stocks by an average of 9.6 percentage points. Moreover, in 9 out of the last 10 years, large caps outperformed penny stocks, however, small caps showed competitiveness back in the days of the internet boom, when the dot-com bubble was breaking in the period 1999 to 2004.
There is hope for a small-cap rebound in 2024, and that is because the historical trends tell us that after nearly a decade of underperformance, the tables turn and small-caps, which include many penny stocks, can rebound. Moreover, in the fourth quarter of 2023, penny stocks showed a recovery in growth and this could set the stage for a renaissance for the small-caps in 2024.
In a recent interview with CNBC, Fundstrat’s head of research, Tom Lee expressed optimism about the potential rise of small-cap stocks in 2024 owing to the softening of inflation in June. Tom Lee further discussed the performance of the small-cap stocks that rose 30% in 8 weeks from October to December 2023. Lee believes that the current rally can be even more substantial compared to last year as it’s driven by factors like larger institutional short positions, small-cap even more oversold, and valuations like median P/E at 10 times 2025 earnings. In addition, June’s Consumer Price Index has declined to its lowest level in the last 3 years, this can lead to the feds cutting the interest rate expected in September 2024. According to the estimates of Tom Lee, in case the interest rate is cut down, the small caps can gain as much as 50% in 2024.
Secondly, presidential elections have been historically in favor of these stocks, research shows that seven out of eleven election times, the small-cap outperformed by an average of 2.68 percentage points.
The recent consumer price index data released in June 2024, suggests a deceleration in inflation, the prices are getting stabilized particularly in core consumer segments such as shelter and food. According to the latest Inflation report, the Personal Consumption Expenditure index (PCE) rose by 0.1% from April matching the Wall Street expectations. Furthermore, the report shows a growth of 0.5% in personal income in the U.S. which is up by $114.1 billion. This potential relief to consumers can stabilize the US market and might influence the Federal Reserve’s Monetary policy decisions in favor of small-cap by cutting interest rates as expected by the end of 2024.
Methodology:
To compile this list of the 10 best-value penny stocks to invest in, we used a screener to narrow down penny stocks trading under $5 on the basis of relatively lower forward p/e ratios compared to their respective industry averages. We further screened these stocks by using metrics like institutional ownership of greater than 40% and ensured that the companies had positive upsides based on analysts’ consensus.
After shortlisting the stocks based on the above-mentioned value metrics, we ranked those stocks based on hedge fund sentiment towards each stock. To rank the penny stocks, we assessed Insider Monkey’s database of hedge fund sentiment of 920 elite hedge funds and their holdings tracked at the end of the first quarter of 2024.
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).
A professional gamer streaming an online game to a massive audience.
iQIYI, Inc. (NASDAQ:IQ)
Number of Hedge Fund Holders: 15
iQIYI, Inc. (NASDAQ:IQ) is an entertainment company based in China that provides online video entertainment services in China. Apart from online entertainment videos the company also offers online games, literature, and animations. The company’s platform combines technology with creative talent to foster an innovative environment to produce blockbuster content.
iQIYI, Inc. (NASDAQ:IQ) distinguishes itself from the online entertainment industry by its AI-powered leading technology entertainment platform. With an in-house studio spearheading the content production, the company is home to some acclaimed drama series and show franchises. The company also offers online advertisement and content distribution services and operates iQIYI Show, a live broadcasting platform that lets viewers follow their favorite TV hosts in real time.
iQIYI Inc. (NASDAQ:IQ) kicked off the year 2024 with a strong first quarter, the company reported a net income of RMB655.3 million grew 6% compared to RMB618.1 million in the same period last year. The growth was driven by a 5% YoY reduction in the cost of revenue and outperformance in key service sectors. For instance, Online advertising services revenue increased 6% YoY and reached RMB1.5 billion driven by the growth of the performance-based advertising business.
In addition, the company had a robust growth of 27% YoY in the content distribution business hitting a historical high by reaching RMB928 million primarily driven by the distribution of several key titles. These figures illustrate the content creation capabilities of iQIYI to produce quality content that is in demand by television stations and viewers.
For instance, last year the company aired a drama called “The Knockout” a gritty crime thriller series about a cop that proved to be a blockbuster and gained 10.79 billion views on the internet. Notably, in the drama category, iQIYI has held the number one position in terms of viewership for 9 straight quarters.
Furthermore, Yu Gong said in the earnings call, that the monthly average revenue per member (ARM) growth reached a new high which marks the sixth consecutive quarter of sequential growth driven by improved operations, enhanced membership offers, and rich content offerings.
In addition, the ad business is flourishing as almost half of the revenue stems from content-targeted ads. For example, the drama “Always on the Move” reached exceptional ad sales performance. Similarly, a show debuting in 2023 named “ Become a Farmer” has seen a notable revenue growth of 80% in ads.
Despite the improvement in sales performance of core segments and a YoY reduction in expenses, the company’s overall revenue decreased by 5% year-over-year. The reason is a fall in membership revenue of RMB4.8 billion down by 13% compared to last year was due to the high base effects created last year with the release of a big hit “ The Knockout”. Moreover, online viewership was reduced partially owing to the surge in travel and offline activities during the Chinese New Year holidays.
Furthermore, the company stated that ARM’s monthly business is growing, though the number of platform users is not mentioned in the earnings call. Don Youqiao, senior vice president of the membership business explained that the decision not to release the number of users was made after careful deliberations and implied that these were neither objective nor a complete measure of business dynamics. He noted that a famous streaming service, Netflix similarly decided to not release the subscriber data.
Netflix (NASDAQ:NFLX) announced that it will stop releasing the subscriber number from the first quarter of 2025, and planned to focus on operating income and revenue as metrics of performance. However, this reasoning failed to convince investors, and the company’s share price fell on concerns that growth might have slowed down. Similarly, iQIYI’s decision may have an impact on share price, if the management fails to convince the investors.
The logical explanation for an increase in revenue per subscriber and a decreasing membership income could be a possible drop in membership numbers. The popularity of dramas does impact the number of viewership, for instance, the success of “The Knockout” series early last year increased the subscriber’s number to 129 million from 111.6 million in the fourth quarter of 2022. Although the company produced good dramas later on but none could gain the same popularity resulting in the drop of membership to 100.3 million in Q4 2023.
According to the Insider Monkey database, 15 hedge funds held stakes in iQIYI Inc. (NASDAQ:IQ), and Farralon Capital has the highest stakes which are worth $161.37 million.
Overall IQ ranks 2nd on our list of the best value penny stocks to buy. While we acknowledge the potential of IQ as an investment, our conviction lies in the belief that 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 is more promising than IQ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.