Executive Summary / Key Takeaways

• Micro-Drama Monetization Infection Point: iQIYI's content library has exploded to over 20,000 micro-drama titles by Q3 2025, with average production costs under RMB 1 million—less than 5% of long-form drama budgets—creating a margin-dilutive content format that generated its first RMB 1 million monthly revenue title in December 2024 and is now the platform's leading category by daily unique visitors.

• Overseas Business as Structural Escape Hatch: While domestic membership revenue faces pressure (down 9% annually in Q2 2025), overseas membership revenue grew over 40% annually in Q3 2025, with Brazil, Spanish-speaking regions, and Indonesia more than doubling year-over-year, providing a growth vector that circumvents China's saturated streaming market and volatile regulatory environment.

• AI Integration Transforms Cost Economics: The company has moved from experimental AI features (Touhou World AI agents launched April 2024) to systematic deployment across production, marketing, and monetization, with AI-powered video ads delivering 20% higher click-through rates and over 70% of overseas promotional material generated using AI, directly improving content ROI and advertising efficiency.

• Financial Fortress Amid Operating Losses: Despite a non-GAAP operating loss of RMB 21.9 million in Q3 2025, iQIYI holds RMB 4.9 billion in cash and liquid assets, has reduced convertible debt from RMB 2.9 billion in early 2023 to $208 million, and generated positive annual free cash flow of RMB 1.94 billion, providing a multi-year runway to execute its transformation without dilutive financing.

• Asymmetric Risk/Reward at 0.08x Sales: Trading at $2.22 per share with a price-to-sales ratio of 0.08x and enterprise value of $25.64 billion, the market is pricing iQIYI as a distressed asset despite its leadership in China's long-form drama market (four consecutive quarters of #1 viewership share) and emerging micro-drama dominance, creating potential for significant re-rating if overseas growth and micro-drama margins scale as management projects.

Setting the Scene: The Evolution from Long-Form Leader to Multi-Format Ecosystem

iQIYI, founded in 2009 as Qiyi.com and rebranded in 2017, occupies a paradoxical position in China's entertainment landscape. Headquartered in Beijing and operating as a subsidiary of Baidu Holdings , the platform built its reputation as one of the "Big Three" video streaming services alongside Tencent Video and Youku Tudou , competing through premium long-form dramas, variety shows, and theatrical releases. This heritage is significant because it endowed iQIYI with institutional capabilities—content licensing relationships, production infrastructure, and a sophisticated technology stack—that competitors in the micro-drama space lack. The company's current transformation isn't a desperate pivot but a strategic layering of new growth engines onto a mature foundation.

The structural challenge iQIYI faces is fundamental: China's long-form video market has matured, with user growth plateauing and attention shifting to short-form content on Douyin and Kuaishou . Rather than ceding this territory, iQIYI is executing a sophisticated flanking maneuver. The company recognized that micro-dramas—vertical-format videos typically 1-20 minutes per episode—were attracting younger audiences with fragmented attention spans, but the market was dominated by low-quality, high-volume producers with limited monetization capabilities. iQIYI's strategic insight was that its premium content expertise, established in 2023 with its intelligent production management system and virtual production technology, could be repurposed to create a higher-quality micro-drama tier with superior economics.

This positioning creates a dual competitive moat. Against traditional streaming rivals, iQIYI's micro-drama library of 20,000 titles and growing rivals dedicated platforms while benefiting from cross-promotion with its premium long-form content. Against short-video disruptors, iQIYI offers production values and storytelling depth that algorithmic feeds cannot match. The company's four consecutive quarters of leadership in total drama viewership share according to Enlightened Data isn't a legacy metric—it's the foundation that makes its micro-drama pivot credible. When "The Thriving Land" and "The Coroner's Dilemma" both exceed 10,000 on iQIYI's popularity index, they're not just hits; they're demonstrable proof that the platform can still create cultural moments that drive subscription revenue and provide marketing leverage for adjacent content categories.

Technology, Products, and Strategic Differentiation

iQIYI's technological differentiation extends beyond content recommendation algorithms into the structural economics of content creation itself. The company's intelligent production management system, deployed across hundreds of dramas and films, has accumulated what management describes as "one of the leading collections of digital assets in China." This digital asset library isn't merely an archive—it's a capital base that can be reused across productions, reducing marginal content costs and accelerating time-to-market. When iQIYI produces a micro-drama for under RMB 1 million, it's leveraging this accumulated asset base in ways that pure-play micro-drama platforms cannot replicate.

The AI integration strategy, launched with the Touhou World AI agent platform in early 2024 and the iJump Talkout chatbot in April, addresses three critical bottlenecks simultaneously. First, AI-powered project assessment has already evaluated nearly 5,000 screenplays and novels, improving greenlight decisions and reducing the risk of costly failures. Second, character design and casting streamlining at the project approval stage compresses development timelines, allowing iQIYI to respond faster to trending genres and audience preferences. Third, promotional efficiency gains—AI-generated materials covering over 70% of overseas content promotion—directly reduce customer acquisition costs, a critical advantage as the company expands into 16 bundled membership partnerships and broadens sales channels across e-commerce and telecom platforms.

The micro-drama product architecture reflects sophisticated platform segmentation. The main iQIYI app treats paid micro-dramas as complementary value-adds to long-form subscriptions, increasing engagement without cannibalizing premium content. Meanwhile, the iQIYI Lite app, revamped to prioritize free micro-dramas supported by advertising, competes directly with short-video platforms while monetizing through a different model. This bifurcation is significant because it allows iQIYI to capture both subscription and ad-supported revenue streams from the same content library, a structural advantage over platforms locked into a single monetization model. The recent launch of a dedicated micro-animation channel, Manju, leveraging AI for original production, extends this multi-format strategy into adjacent content categories with even lower production costs and faster iteration cycles.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

The Q3 2025 financial results, while showing a modest non-GAAP operating loss of RMB 21.9 million, actually demonstrate the company's strategic progress when viewed through the lens of segment dynamics. Membership services revenue of RMB 4.2 billion grew 3% sequentially, driven by original blockbusters like "Nezha 2" and "The Thriving Land," proving that iQIYI's premium content engine remains intact. This is crucial because it funds the micro-drama expansion without requiring dilutive capital raises. The family-oriented Star Diamond plan, which generated 78% of new subscriptions from upgrades in Q4 2024, shows pricing power and member loyalty that micro-dramas can leverage through cross-promotion.

The advertising segment's mixed performance reveals both challenges and strategic adaptation. While Q3 2025 revenue of RMB 1.2 billion declined 2% sequentially due to tough comparisons with a major campaign in Q2, brand ads delivered double-digit annual growth with content-related solutions contributing over 60% of brand ad revenue. The implication is that advertisers are paying premium CPMs for contextually integrated placements, not commoditized pre-roll. AI-powered video ads achieving 20% higher click-through rates in Q2 2025 demonstrate that technology investments directly improve monetization efficiency, offsetting macro headwinds that caused some advertisers to adjust strategies. As iQIYI prepares product placements within micro-dramas and dedicated ad products for its micro-drama "shelter," it's creating new inventory that didn't exist a year ago, potentially expanding the addressable ad market rather than just competing for existing budgets.

Content distribution revenue's explosive 48% sequential growth to RMB 644.5 million in Q3 2025 provides the clearest validation of iQIYI's content strategy. The strong performance of original theatrical movies like "Nezha 2" in overseas markets, combined with growing drama transactions, shows that iQIYI's content investments create assets with durable monetization potential beyond first-run streaming. The innovative revenue-sharing model for films with limited box office potential, which generated over RMB 17 million in Q3 from titles like "A Cool Fish 2," demonstrates management's creativity in extracting value from every content dollar spent. This is important because it de-risks content investment—if a theatrical release underperforms, platform distribution can still deliver meaningful returns.

The balance sheet transformation is perhaps the most underappreciated aspect of iQIYI's financial story. With RMB 4.9 billion in cash and liquid assets at Q3 2025, down modestly from RMB 5.1 billion at Q2, the company has maintained liquidity while funding its strategic pivot. The reduction in outstanding convertible bonds from RMB 2.9 billion in early 2023 to $208 million eliminates a major overhang, and the domestic RMB debt now has a healthy 50-50 split between long-term and short-term maturities. CFO Jun Wang's commentary that the capital structure is "pretty healthy enough to support our daily operations and also the long-term development" isn't mere reassurance—it's a statement of strategic optionality that allows iQIYI to invest aggressively in micro-dramas and overseas expansion without financial distress.

Competitive Context: Defending the Core While Attacking New Fronts

iQIYI's competitive positioning requires analyzing three distinct battlegrounds. In long-form video, the company maintains clear leadership, securing the top spot in total drama viewership market share for four consecutive quarters through Q2 2025, and dominating the online movie category for fifteen consecutive quarters. This is significant because it provides stable cash flows and content acquisition leverage that pure-play micro-drama platforms lack. When "The King of Stand-Up Comedy Season 2" achieves the industry's highest viewership market share and generates impressive membership and ad revenue simultaneously, it demonstrates iQIYI's ability to create hits that monetize across multiple revenue streams—something Tencent Video and Youku (BABA) struggle to replicate consistently.

The micro-drama battlefield presents a more nuanced picture. iQIYI entered this space aggressively in Q3 2024, and within a year built a library of 20,000 titles, with over half available for free. The company's first IP-adapted micro-drama, "How Dare You," achieved a peak popularity index of 5,500—a historical high for the platform—while broadening the typical micro-drama audience to younger, more diverse demographics. This is important because it validates the "premium micro-drama" thesis: iQIYI isn't competing on volume but on quality, leveraging its original production capabilities to command higher engagement and sponsorship rates. The fact that micro-dramas became the second-largest category in daily time spent and the leading category in daily unique visitors by Q1 2025 shows the strategy is working, but the 114% sequential growth in overseas micro-drama membership revenue by September 2025 suggests the real prize may be global markets where iQIYI faces fewer entrenched competitors.

The short-video threat from Douyin and Kuaishou represents both the catalyst for iQIYI's transformation and its most persistent risk. These platforms are capturing younger users' fragmented attention with algorithmic feeds and user-generated content, pressuring all traditional streamers' ad revenues. iQIYI's response—using micro-dramas to compete for the same fragmented attention but with higher production values—creates an interesting asymmetry. If successful, iQIYI can potentially upsell micro-drama viewers to long-form subscriptions, creating a funnel that short-video platforms cannot replicate. However, the 13% annual decline in online advertising revenue in Q2 2025, attributed to macro pressures and advertiser strategy shifts, shows that this defensive moat is still being tested. The success of AI-powered advertising tools and new micro-drama ad inventory will likely determine whether iQI can stabilize this revenue stream.

Outlook, Management Guidance, and Execution Risk

Management's forward-looking statements reveal a company at an inflection point, but one that requires flawless execution to realize its potential. CEO Lu Gong's vision that "AI will become a core engine of content creation" within three to five years isn't just aspirational—it's a timeline that implies massive operational transformation. The company's investment in the Peter Pau iQIYI AI Center, coupled with AI applications spanning project assessment, character design, and promotional material generation, suggests a clear path to reducing content costs while improving quality. This is critical because if iQIYI can achieve even 10-15% content cost savings through AI while maintaining engagement, it would swing the company from operating losses to meaningful profitability given that content costs consumed RMB 4 billion of the RMB 6.7 billion in Q3 revenue.

The overseas expansion strategy presents a classic execution trade-off. Management's stated goal of pursuing "rapid revenue growth while maintaining profitability" in established markets (Thailand, Malaysia, North America) while focusing on pure revenue growth in new markets (Indonesia, South Korea, Middle East, Latin America) requires careful capital allocation. The 40%+ annual membership revenue growth in Q3 2025, with Brazil and Spanish-speaking regions more than doubling, provides compelling evidence that Chinese content has global appeal. However, the company's decision to produce local content in Thailand, Malaysia, Indonesia, and Taiwan—where Thai dramas have already become the second-most popular content category after C-dramas—represents a significant content cost increase before revenue materializes. The implication is that iQIYI is betting its international future on replicating its domestic production capabilities abroad, a strategy that historically has burned capital for many media companies.

The experience business, including IP-based consumer products and iQIYI Labs, represents management's third growth lever but also its most uncertain. The dual-track strategy of combining self-operated merchandise with licensing for IP like "The Journey of Legend" (which partnered with over 30 licensees) has already achieved RMB 100 million in gross merchandise value from self-operated live table trading cards in H1 2025. The asset-light iQIYI Labs model—integrating AI and XR with content IP for interactive experiences—could create a Disney-like flywheel where content drives experiential revenue that funds more content creation. However, with only two labs under development (Yangzhou, Kaifeng) and a third announced in Beijing, this remains a nascent initiative whose revenue contribution (expected mainly from ticket sales and on-site spending) is unlikely to move the needle until 2026.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to iQIYI's investment case is execution failure in micro-drama monetization at scale. While the company has proven it can create popular micro-dramas and attract viewers, the path from engagement to sustainable profits remains uncertain. Management's guidance emphasizes "exploring more ways to monetize growing traffic, such as advertising and commerce," but the Q3 2025 advertising segment's 2% sequential decline shows that even with new inventory, macro headwinds can overwhelm structural improvements. If micro-drama viewership growth continues to outpace revenue per user, iQIYI could face a classic scale trap: higher server costs and content amortization without proportional monetization, potentially worsening operating losses.

Content cost inflation represents a second-order risk that could undermine the micro-drama cost advantage. While current top-tier micro-dramas cost under RMB 2 million, the industry's rapid growth is attracting more professional producers and raising talent costs. iQIYI's strategy of consistently delivering premium micro-dramas through original production could see costs creep toward RMB 3-4 million per title, eroding the margin advantage over long-form content. The company's RMB 4 billion content cost in Q3 2025 (up 7% sequentially) during a heavy content launch period suggests this pressure is already material, and management's ability to balance quality with cost discipline will be critical.

Regulatory risk, while currently framed as supportive, remains a double-edged sword. The new policies promoting "healthy development of the long-form video industry" have created benefits like concurrent drama review and optimized co-review processes, with some projects reaching "ready-to-broadcast status more quickly." However, the Chinese government's history of abrupt policy shifts in technology and media means this favorable environment could reverse, particularly if micro-dramas face content restrictions or if overseas expansion triggers geopolitical friction. The fact that iQIYI must operate as a subsidiary of Baidu Holdings (BIDU) creates additional concentration risk if parent company priorities shift.

The competitive moat against short-video platforms appears vulnerable to user behavior changes. While micro-dramas have achieved leadership in daily unique visitors, Douyin and Kuaishou (KUASF)'s algorithmic feeds are tuning engines that improve daily. If these platforms increase their investment in scripted short-form content—leveraging their massive user data and distribution advantages—they could erode iQIYI's micro-drama leadership. The company's 15,000-title library by Q1 2025, while impressive, is still smaller than the infinite content supply enabled by user-generated platforms, making iQIYI's quality differentiation strategy its only sustainable defense.

Valuation Context: Pricing in Distress Versus Transformation Potential

At $2.22 per share, iQIYI trades at a market capitalization of $2.14 billion and an enterprise value of $25.64 billion, reflecting significant net debt but also substantial operating lease obligations and content commitments. The price-to-sales ratio of 0.08x is exceptionally low for a streaming platform, particularly one maintaining market leadership in its core category. For context, global peers like Netflix (NFLX) trade at 4-5x sales, while even struggling domestic competitors command higher multiples. This valuation gap implies the market views iQIYI as a melting ice cube, discounting both its cash position and transformation potential.

The financial ratios tell a more nuanced story. The annual free cash flow of RMB 1.94 billion (approximately $270 million) gives the stock a price-to-free-cash-flow ratio of 7.9x, which is attractive for a company with growth prospects. However, quarterly free cash flow volatility—negative RMB 290 million in Q3 2025—reflects the seasonal nature of content spending and makes forward cash flow prediction challenging. The debt-to-equity ratio of 1.11x appears concerning, but with RMB 4.9 billion in cash and manageable debt maturities, the company has sufficient liquidity to navigate its transformation. The absence of a dividend and 0% payout ratio signals that all capital is being reinvested in growth, appropriate for a company at an inflection point.

The enterprise value to revenue multiple of 0.95x suggests that after accounting for debt and cash, the market is essentially valuing iQIYI's operations at a slight discount to annual revenue of RMB 29.23 billion. This is anomalously low for a streaming business with positive annual net income and growth opportunities. The negative operating margin of -1.82% and negative quarterly net income create a "show me" story where investors await proof that micro-drama scale and overseas growth can overcome domestic headwinds. However, the gross margin of 22.30% provides a foundation for operating leverage if content costs can be controlled through AI and micro-drama economics.

Peer comparisons highlight iQIYI's relative undervaluation and operational challenges. Tencent's (TCEHY) video segment grows more modestly but benefits from the parent's 55.49% gross margin and 32.95% operating margin, reflecting ecosystem advantages. Bilibili (BILI), with 36.36% gross margin and recent profitability turnaround, trades at 0.38x sales—nearly 5x iQIYI's multiple—despite smaller scale and less diversified revenue. This multiple compression for iQIYI reflects market skepticism about its ability to execute the micro-drama pivot profitably while maintaining long-form leadership. The bet for investors is that management's multi-format strategy will eventually command a re-rating toward at least 0.3-0.5x sales, implying 3-6x upside from current levels if execution continues.

Conclusion: Three Levers, One Asymmetric Wager

iQIYI's investment case distills to a single question: Can the company transform its leadership in China's mature long-form video market into a multi-format, AI-enabled entertainment ecosystem that generates sustainable profits? The evidence suggests a qualified yes. Micro-dramas have grown from zero to the platform's leading content category by daily unique visitors in under 18 months, with a content cost structure that could fundamentally alter the streaming industry's economics. Overseas expansion is delivering 40%+ membership growth in key markets, creating a geographic diversification story that reduces dependence on China's volatile domestic environment. AI integration, while still in early stages, is already improving ad efficiency and content production velocity.

The asymmetry lies in the valuation. Trading at 0.08x sales with RMB 4.9 billion in cash and positive annual free cash flow, the market has priced iQIYI as if its transformation will fail. Yet the company maintains clear leadership in its core drama category, has built a 20,000-title micro-drama library, and is expanding overseas at triple-digit rates. If management can demonstrate that micro-drama monetization can achieve even 20-30% margins and overseas revenue can reach 30% of total revenue within two years, the stock appears severely mispriced. The critical variables to monitor are sequential micro-drama revenue per user (to confirm monetization scaling) and overseas membership growth sustainability (to validate the geographic diversification thesis). For investors willing to accept execution risk, iQIYI offers exposure to China's evolving digital entertainment landscape at a valuation that provides substantial downside protection while retaining optionality on a successful transformation.