Shares in iQIYI Inc. (IQ) jumped 35% in pre-market trading amid a report that China’s online gaming company Tencent Holdings Ltd. (TCEHY) is seeking to become the largest shareholder in the video streaming company.
The stock leaped to $25.78 after Reuters reported that Tencent approached iQIYI’s 56.2% owner Baidu Inc. (BIDU) to buy a stake of as-yet undetermined size. Shares in Baidu rose 7.2% to $125.25 in early trading.
According to the report, Tencent wants to cut costs and counter competition in a sector boosted by stay-at-home coronavirus policies.
“A tie-up would improve their bargaining power when producing and purchasing content, and lower marketing costs that would otherwise be spent on grabbing users from each other,” according to a person quoted in the Reuters report.
Plans are at an early stage and subject to change. The potential deal would bring together two of China’s biggest media networks, with each boasting over 110 million paid subscribers at March-end.
Nasdaq-listed iQIYI has a market capitalisation of $14 billion and shareholder voting power is 92.7% controlled by Baidu. Both Tencent and iQIYI have seen content expenses grow as they compete with each other as well as operators of user-generated video sharing sites such as Bilibili Inc (BILI) and Bytedance, owner of TikTok.
Taken together, China’s online video market is set for 2020 revenue of 156.6 billion yuan ($22.1 billion).
Tencent shares have advanced 18% so far this year as stay-at-home orders boosted demand for its online gaming products. The stock was little changed at $56.83 at the close on Monday.
Five-star analyst Jason Helfstein at Oppenheimer who has a Buy rating on the company with a $58 price target believes that Tencent will continue to take market share due to innovation.
“There is still ample runway for its burgeoning advertising business with the largest online audience in China,” Helfstein wrote in a note to investors. “We see great potential in the company’s new initiatives: mini programs, cloud, and video. The success of any of these would add significant value to the company’s overall ecosystem.”
Indeed, all six analysts covering Tencent stock are bullish on its outlook, giving it a firm Strong Buy consensus. Meanwhile the $60.50 average analyst price target indicates 6% upside potential from current levels. (See Tencent Holdings stock analysis on TipRanks).