Chinese video-on-demand service company iQIYI Inc. (NASDAQ: IQ) has been fudging user numbers since before its initial public offering in 2018 in New York, and has continued to do so, short seller Wolfpack Research said in a report Tuesday.

What Happened

According to Wolfpack, iQIYI inflated 2019 revenue by about $1.1 billion to $1.8 billion, 27% to 44% over its actual revenue.

The Baidu Inc.-owned (NASDAQ: BIDU) company did this by inflating the actual number of users on its platform by 42% to 60%.

Wolfpack said it surveyed 1,563 people among iQIYI's "target demographic" in China and found that about one-third of the company's users acquired their memberships through partner companies such as JD.com Inc. (NASDAQ: JD) or Xiaomi Corp. (OTC: XIACF).

About half of these memberships were acquired for free or "near-free" under some "buy-one-get-one" offers.

iQIYI counts the entire revenue from these memberships but writes off their partners' revenue as expenses. "This allows IQ to inflate its revenues and burn off fake cash at the same time," Wolfpack said.

Muddy Waters Backs, iQIYI Rubbishes Report

Muddy Waters Research, an early investor in Wolfpack, backed the research.

"[We] believe it's a fraud," Muddy Waters said in a tweet. "We assisted Wolfpack with comprehensive research into iQIYI...[It] fraudulently and materially overstates its users, revenues, acquisition consideration, and value of its ‘barter' content."

iQIYI responded to the short seller report, saying it contains "numerous errors, unsubstantiated statements and misleading conclusions and interpretations regarding information relating to the Company."

The Wolfgang report comes days after Luckin Coffee Inc. (NASDAQ: LK) admitted to chief operating officer inflating sales numbers in its previous filings with the United States Securities and Exchange Commission.

In a report in January, Muddy Waters had similarly suggested that Luckin was fudging sales and inventory numbers, among others.

Price Action

iQIYI stock closed 3.22% higher at $17.30 on Tuesday. The shares traded 3.6% lower at $16.68 in the after-hours session.

Baidu closed 1.1% lower at $101.79 and traded another 1.3% lower in after-hours at $100.49.

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