We recently compiled a list of the 10 Best Long-term Penny Stocks to Buy Now. In this article, we are going to take a look at where iQIYI, Inc. (NASDAQ:IQ) stands against the other long-term penny stocks.
Analysis of the Current Market Environment
A market analysis discussion was held on July 8 with a CNBC panel comprising Carson Group chief market strategist, Ryan Detrick, and Wealth Enhancement Group SVP, Nicole Webb. Both panelists believe that we are in a bullish market and the trend is expected to continue. Webb expressed optimism about the market’s potential to churn higher, even during the current overbought environment. She expects continued defensiveness and earnings growth from mega-cap tech companies. Webb is hopeful for a shift towards rate normalization rather than abrupt cuts.
Ryan Detrick shared bullish sentiments, basing his outlook on the improving inflation data. He pointed out that 34% of the core Personal Consumption Expenditures (PCE) components are experiencing deflation, with notable declines in used car prices and grocery store prices. He expects the Fed to cut rates in September and November, and he believes that these cuts will be in response to declining inflation rather than a sign of economic weakness.
When the CNBC interviewer noted the significant gains leading tech companies contributed and questioned the reliance on these firms for sustained market growth, Nicole Webb acknowledged the complexity of these market themes. However, she maintained a positive outlook and expects broader market earnings growth in the second half of the year. She mentioned favorable conditions for rate cuts and ongoing advancements in AI-driven productivity and cost-cutting as supportive factors for the bull market.
Penny Stocks: Opportunities and Risks in the Current Market Environment
The current market conditions as discussed above present a mixed bag for penny stocks. On one hand, the overall bullish sentiment and expected rate cuts could provide a favorable environment. Lower interest rates typically reduce borrowing costs and can lead to increased investment in riskier assets, including penny stocks. Additionally, a strong economy and rising market indices may boost investor confidence, which could potentially drive more speculative investments into lower-priced stocks.
However, there are also significant challenges. The reliance on mega-cap tech companies for market gains suggests that investors are favoring well-established, financially stable firms over riskier, smaller companies. This preference for safety and quality can limit the flow of capital into penny stocks. Furthermore, the high valuations and earnings expectations for larger firms mean that any market corrections or shifts in sentiment could disproportionately impact smaller, more volatile stocks. This would especially be true if we take Morgan Stanley’s Mike Wilson’s comments into account. In a Bloomberg TV interview on July 8, he said that there is a high chance of a 10% correction between now and the US election and added that the third quarter of the current year is going to be “choppy.”
Overall, while some positive macroeconomic trends could benefit penny stocks, investors need to be cautious. The market’s current emphasis on stability and proven performance may not bode well for these highly speculative investments. Thorough research and a clear understanding of the risks should be on top priority for those considering penny stocks in this environment.
Our Methodology
For this article, we identified around 20 fundamentally strong penny stocks (trading below $5 on July 18) from several financial media websites and sources. We only chose the stocks that have been profitable for at least over a year, showed signs of earnings growth, and have significant future growth prospects. We narrowed down our list to 10 stocks most widely held by institutional investors. The stocks are listed in ascending order of their hedge fund sentiment.
Why do we care about what hedge funds do? 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)
Share Price as of July 18: $3.65
Number of Hedge Fund Holders: 15
Our top stock pick in the list, iQIYI, Inc. (NASDAQ:IQ) offers online entertainment video services in China and internationally. The company’s product offerings include online video, online games, online literature, and more. Its services are offered through its main platform, as well as through a live broadcasting platform known as the iQIYI Show. As of 2024, iQIYI (NASDAQ:IQ) has a subscriber base of over 100 million and its online video platform has over 400 million monthly active users.
iQIYI (NASDAQ:IQ) is strategically expanding into international markets, with a specific focus on Southeast Asia and other Asian regions to drive future growth. In the recent quarter, the company reported strong revenue expansion. Membership revenue saw significant year-over-year and sequential increases, particularly with substantial growth, an 80% annual increase in markets such as Hong Kong and the UK. It highlights the company’s effective strategy in broadening its global presence.
The popularity of iQIYI ‘s (NASDAQ:IQ) original content among international audiences has been a major driver of this growth. Shows like Sword and Fairy have gained substantial viewership across various regions, ranking prominently in countries such as Thailand, Vietnam, and Indonesia. Similarly, the second season of Rampas Cintaku, an original Malaysian production, has significantly boosted traffic and membership revenues on the company’s Malaysian side. The success is evidence of iQIYI’s ability to utilize premium content and local partnerships to enhance global market reach and revenue growth.
Additionally, iQIYI (NASDAQ:IQ) has strengthened its position through strategic collaborations with telecommunications firms and tourism authorities in Hong Kong and Thailand. For example, the company’s drama series Lansdowne secured a prime slot on selected local TV stations in Thailand, which increased its brand visibility and viewer engagement. iQIYI’s (NASDAQ:IQ) management plans to maintain a steady pipeline of high-quality CPOP content to sustain and expand its presence in international markets.
Moreover, the company aims to accelerate the production of original content tailored specifically for local audiences, to deepen viewer engagement and loyalty. Management remains committed to promoting CPOP and local content through ongoing partnerships with Southeast Asian TV stations, which will reinforce its brand presence in key markets. Its approach will improve the company’s competitive edge and position it to capitalize on the growing demand for premium entertainment across Asia.
In the first quarter, 15 hedge funds held positions in iQIYI (NASDAQ:IQ) and their stakes amounted to $107.953 million. As of March 31, Maple Rock Capital is the most dominant shareholder in the company and has a position worth $43.65 million.
Ariel Global Fund made the following comment about IQIYI (NASDAQ:IQ) in its Q2 2023 investor letter:
“Lastly, we established a new position in IQIYI, Inc. (NASDAQ:IQ), a leading long form online video entertainment service in China. Despite facing recent obstacles, including competition from short-form content platforms, iQIYI boasts a devoted user base, robust partnerships with major content providers and an extensive collection of original and licensed content. Our confidence in this investment is further strengthened by iQIYI’s implementation of a proprietary industrialized production system. This technology leverages data-driven approaches to effectively manage content creation, allocate budgets, and monitor production progress, facilitating sustainable growth and informed decision-making.”
Overall IQ ranks 1st on our list of the best long-term penny stocks to buy. You can visit 10 Best Long-term Penny Stocks to Buy Now to see the other long-term penny stocks that are on hedge funds’ radar. 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.
