And just a few more points on iQIYI, I think, we need to recognize the business model of online video. Now, if you look at in the U.S., there's basically two type of models, and one type of model is, basically you're just a distributor, right? You license content that's already well known. You pay for a heavy content costs, and what you're doing is, you're just trying arbitrage and trying deliver on your platform. That's one model, and we've seen that over the last few years; people who license already very top brands and so forth, and the margin is very, very low.
The other type of business we're seeing, and we're seeing this as the one that's more successful is companies, they're able to leverage and bridge those with deep entertainment knowledge and technology, and those are the type of companies that can actually self-produce content that become top hits. So at the end of the day, that business model is basically trying to be an IP powerhouse.
Once you can make top hits, you can get a lot of memberships, attract a lot of people. Now, when you have that scale, that base, then you also prove to the entertainment industry that you really understand entertainment, other people will want to license their content to you, and all of a sudden you have that inertia of both user scale and also that partnership. And by having that kind of creative, innovative leverage, then you can continue to make and more content.
So this is kind of the path that we're seeing with iQIYI. So I believe, in online video, it's important to understand that business model. Those that actually can create great content while being a great technology company can continue to get more and more content, whether it's through self-production or through signing with a strategic partner, because they trust you, they know that you understand entertainment, I think that's where iQIYI is positioned. And I think, that's where our strategic advantage is.
Baidu wants to be the Netflix of China and aims to reach a high scale and a portfolio of IP and valuable content that will allow it to reach the market power and “inertia” the management talked about. This means that we can’t expect such a fast and aggressive improvement in margins, although it’s obvious that losses in the division will continue to decline over time and help overall profitability.
Conclusion
With such a strong improvement in margins and another confirmation of renewed momentum in the core business, I think that results from Q3 confirm the bullish case. I really don’t think the recent dip in the stock price makes sense as there is no fundamental deterioration nor a significant deceleration that could make Thursday’s price too high. I confirm my previous valuation of the stock and I still see around 30% upside (Price target: $301) from the current levels based on the positive scenario of my SOTP valuation.
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