Executive Summary / Key Takeaways

• iQIYI is undergoing a strategic transformation, leveraging its core strength in premium long-form video content while aggressively expanding into the high-growth micro-drama market and global territories. This dual-content strategy, coupled with significant AI integration, is designed to enhance user engagement and unlock new monetization avenues.
• Despite recent revenue declines in its core membership and advertising segments due to macro pressures and content slate variations, iQIYI demonstrated sequential growth in Q1 2025 and strong performance in its overseas business, which saw membership revenue grow approximately 35% annually in Q2 2025.
• The company's robust investment in AI is a key differentiator, yielding quantifiable benefits such as a 10-fold efficiency boost in digital asset generation and a 20% increase in click-through rates for AI-powered ads, directly contributing to cost savings and improved monetization.
• iQIYI maintains market leadership in key content categories like drama and movies in China, and its strategic pivot to micro-dramas is showing early success, with the market size for mini-dramas expected to exceed the Chinese box office in 2025.
• Key risks include ongoing macro headwinds impacting advertising spend and consumer caution, alongside intense competition from both traditional streaming rivals and short-form video platforms. However, a disciplined approach to debt management and a focus on high-quality, diversified content position iQIYI for sustainable long-term value creation.

iQIYI's Evolution: Reinvention in China's Entertainment Landscape

iQIYI, Inc., established in 2009, has consistently demonstrated a core strength in reinvention and innovation within China's dynamic online entertainment sector. The company's foundational business revolves around providing a comprehensive suite of online video services, encompassing professionally produced, licensed, and self-produced long-form content, alongside ventures into online games, literature, and comics. This extensive content library and a deep understanding of user preferences have positioned iQIYI as a leading player in the industry.

The company's strategic evolution is a direct response to a shifting market landscape. Consumers are increasingly cautious due to macro headwinds, and the entertainment ecosystem is fragmenting with the rapid growth of diverse options, particularly free mini and short-form content. In this environment, iQIYI's overarching strategy centers on a "long + short" content approach, significant AI integration, global expansion, and the development of an "experience business" to extend its intellectual property (IP) lifecycle. This multi-pronged strategy aims to build a beloved national brand and strengthen market leadership through exceptional user experiences and a wide-ranging content ecosystem.

Technological Edge: AI as a Core Differentiator

iQIYI's commitment to harnessing artificial intelligence is a critical differentiator, transforming entertainment experiences and amplifying content value. The company has integrated AI across its operations, from content production to user engagement and advertising, yielding tangible and quantifiable benefits.

A prime example is the AI-powered iJump Talkout feature, introduced in Q2 2025, which redefines viewer engagement by offering faster-paced, micro-drama-like experiences. Users can effortlessly skip between key plots in over 2,300 dramas and variety shows with a simple swipe, significantly boosting user engagement. Furthermore, Touhou World, launched in early 2024, stands as an industry-first AI agent-based NPC data platform, featuring over 102,000 NPC agents that engage fans 24/7.

In content production, AI has dramatically improved efficiency. For instance, on the set of "The Great Nobody two," AI boosted the efficiency of digital asset generation by over 10-fold, cutting costs and shortening production time. AI also supports qualitative script analysis for romance dramas, enabling in-depth evaluation of characters and relationships, and identifying unneeded plot points. These advancements streamline the creative process and enhance content quality.

The impact of AI extends to monetization, particularly in advertising. AI-powered video ads have shown a 20% increase in click-through rates compared to those created without AI, with the Cost Per Mille (CPM) of AI-powered ads improving by over 20% compared to traditional ads. This directly translates to more effective advertising and enhanced revenue potential. For its overseas business, AI plays a central role in efficient and highly accurate multilingual translation and subtitling, reducing the time and costs associated with global content distribution. Moreover, an AI system for rapidly generating plot tags for the content library has transformed a month-long manual task into a matter of days, producing plot tags for over 12,000 movies with an impressive accuracy rate exceeding 92%. In casting, AI efficiently analyzes and matches actors to roles, streamlining producers' decision-making.

For investors, iQIYI's deep integration of AI creates a significant competitive moat. It leads to higher user engagement, lower operational costs, faster content production, and improved monetization capabilities across its diverse offerings. This technological roadmap is foundational to the company's long-term growth strategy and its ability to maintain a leading market position.

Competitive Dynamics and Strategic Positioning

iQIYI operates in a highly competitive online entertainment market, primarily contending with major players such as Tencent Video (TCEHY), Youku (a subsidiary of Alibaba Group (BABA)), and Bilibili (BILI), with global streaming giant Netflix (NFLX) also presenting an international overlap. iQIYI consistently demonstrates strong market leadership in core content categories. According to Enlightened data, it maintained the top spot in total drama viewership market share for four consecutive quarters and dominated the movie category for fourteen consecutive quarters. In Q2 2025, iQIYI accounted for four of the top five spots in Enlightened's total viewership list for variety shows, with "The King of Stand Up Comedy Season two" commanding the industry's highest viewership market share in its category.

Compared to Tencent Video, iQIYI's Baidu affiliation provides advanced search and recommendation algorithms, leading to notably more efficient user targeting. However, Tencent's broader ecosystem, including WeChat, offers stronger cross-promotion capabilities. Against Youku, iQIYI's focus on high-quality, professionally produced videos provides significantly greater appeal for premium users, potentially leading to materially better user retention in streaming services, while Youku benefits from strong e-commerce synergies. Bilibili excels in user-generated content and community engagement; iQIYI, in contrast, offers substantially higher production quality in its polished, licensed content, appealing to a broader, mainstream audience. Globally, iQIYI's content is notably better localized for Chinese audiences compared to Netflix's global approach, giving it a stronger domestic market position.

Indirect competitors, including short-form video platforms like Douyin (ByteDance) and social media giants like Weibo (WB), pose a significant challenge by capturing user attention and advertising budgets. iQIYI's strategic response involves integrating mini and short dramas into its ecosystem, leveraging its mature technology, infrastructure, and existing content provider partnerships to scale up at a relatively low cost. This allows iQIYI to compete directly in the rapidly growing short-form content space while maintaining its strength in long-form video.

Financial Performance and Operational Resilience

iQIYI's financial performance in recent quarters reflects both market challenges and the early impacts of its strategic pivots. In Q2 2025, total revenues were RMB 6.6 billion. Membership services revenue decreased by 9% annually to RMB 4.1 billion, primarily due to a lighter content slate compared to the previous year. Online advertising revenue also saw a 13% annual decrease to RMB 1.3 billion, as advertisers adjusted strategies amid macro pressures. Despite these declines, content costs were reduced by 8% annually to RMB 3.8 billion, and total operating expenses decreased by 3% annually to RMB 1.4 billion, demonstrating disciplined cost management. The non-GAAP operating income margin for Q2 2025 was 1%.

Looking back, Q1 2025 showed sequential growth, with total revenues reaching RMB 7.2 billion, up 9% from the previous quarter, driven by a strong rebound in long-form premium content and strategic investments in micro-dramas. Membership services revenue increased 7% sequentially to RMB 4.4 billion. This highlights the critical dependency on a robust content slate for membership growth. For the full year 2024, iQIYI reported a net income of 764.06 million CNY on total revenue of 29.23 billion CNY. The company's gross profit margin (TTM) stands at 22.88%, with an operating profit margin (TTM) of 2.96% and a net profit margin (TTM) of 0.32%.

Liquidity and capital structure have seen significant improvements. As of the end of Q2 2025, iQIYI held RMB 5.1 billion in cash, cash equivalents, and investments. The company repurchased $85 million of its 2028 notes, reducing the outstanding balance to $208 million, and its net interest expense decreased by 33% year-over-year. This proactive debt management, coupled with 12 consecutive quarters of positive operating cash flow (RMB 339 million in Q1 2025), underscores a healthy capital structure capable of supporting daily operations and long-term development.

Strategic Initiatives and Future Outlook

iQIYI's outlook is anchored in its "long + short" content strategy, global expansion, and continued AI integration. The company is committed to delivering premium long-form content, focusing on realistic, suspense, and female-oriented dramas, while also reducing episode counts for a more compelling viewer experience. The micro-drama segment is a key growth driver, with the company aiming to expand its portfolio of over 15,000 titles through original production and licensing. Management anticipates the micro-drama market size will exceed the Chinese box office in 2025, presenting a significant monetization opportunity through advertising and e-commerce.

Overseas expansion is a critical pillar for future growth. In Q2 2025, the overseas business achieved record highs in subscriber base and revenue, with membership revenue growing approximately 35% annually. Key markets like Brazil, Mexico, Indonesia, and Spanish-speaking regions reported over 80% annual growth. iQIYI plans to pursue rapid revenue growth while maintaining profitability in these markets, and is preparing to expand into new territories such as the Middle East, Latin America, and Brazil. The global popularity of C-dramas, which saw worldwide search interest reach a 5-year high in Q1 2025, provides a strong tailwind for this strategy.

The company's "experience business," encompassing IP-based consumer products and offline experiences, is also gaining traction. Self-operated live table trading cards generated over RMB 100 million in GMV in the first half of 2025. Two iQIYI Lands are in development, and over 50 immersive shelters are already operational, leveraging an asset-light strategy to extend IP value.

Management's guidance for Q2 2025 indicated flat revenue, implying a potential year-over-year decline of 3-4%, and an expectation for adjusted EBIT to break even. This reflects the ongoing macro pressures and the transitional phase of its strategic initiatives. However, the company remains confident that the strong comeback of premium long-form videos and continuous innovation in micro-dramas will serve as "fuel engines" for growth in 2025. New long-form video policies in China are also expected to positively impact content production, review cycles, and industry investment.

Risks and Challenges

Despite its strategic initiatives, iQIYI faces several pertinent risks. Macroeconomic headwinds continue to exert pressure on advertising budgets, leading to adjustments in advertiser strategies as observed in Q2 2025. Consumer caution and the proliferation of diverse, often free, entertainment options intensify competition for user attention and subscription dollars. The company's reliance on a consistent supply of premium content for membership acquisition and retention remains a key dependency.

Furthermore, regulatory scrutiny in China and the persistent threat of piracy could impact content availability, operational flexibility, and profitability. While iQIYI has made strides in cost management, the inherent high costs associated with premium content production remain a challenge. However, the company's proactive measures, including disciplined cost control, debt optimization, and diversification into new content formats and markets, are designed to mitigate these risks and foster sustainable growth.

Conclusion

iQIYI is undergoing a profound transformation, strategically pivoting to capitalize on evolving consumer preferences and technological advancements. By embracing a "long + short" content strategy, powered by its deep integration of AI, and aggressively pursuing global expansion, the company is laying the groundwork for sustainable long-term value creation. Its technological leadership in areas like AI-driven content production, user engagement, and advertising optimization provides a distinct competitive edge, enhancing efficiency and monetization across its diverse offerings.

While facing ongoing macro pressures and intense competition, iQIYI's disciplined financial management and proven ability to innovate position it to navigate these challenges. The success of its micro-drama initiatives and the accelerating growth of its overseas business, coupled with a robust pipeline of premium long-form content, underscore a compelling investment thesis. iQIYI's strategic evolution, driven by technological prowess and a clear vision for content diversification, suggests a resilient future in the global entertainment landscape.