Chinese search stock Baidu (BIDU) gained more than 3% before its earnings report yesterday, and BIDU stock then tacked on another 6% gain after-hours.
That’s because the Baidu earnings report for the third quarter was solid. Of course, the earnings weren’t the real catalyst for BIDU. Instead, revenue was they key metric in the Baidu earnings report.
Tacking on its after-hours gains, BIDU stock has gained an eye-popping 68% year-to-date and is set to open to a new 52-week high.
Baidu Earnings Details
Many investors have been worried that young up-and-coming rival Qihoo (QIHU) was stealing Baidu’s market share, but Q3 earnings show BIDU is trekking along just fine.
There are three main details to know about the Baidu earnings report that sent BIDU stock even higher. Take a look:
- BIDU revenue increased by 42% to RMB 8.89 billion, beating analyst expectations of RMB 8.81 billion. The Baidu CEO also added that, “Mobile search revenues in particular continued to grow at an exciting pace as more of our customers recognize the benefits of mobile marketing on the Baidu platform.”
- Baidu earnings growth was meager, with net income only expanding 1.3% year-over-year. Still, Baidu earnings per share beat analyst expectations — a nice change of pace considering BIDU EPS fell short in two out of the four previous quarters.
- Baidu earnings growth is far behind its sales growth for one simple reason: BIDU is investing in future growth. The company recently reached an agreement with NetDragon Websoft (NDWTY), for example, to buy one of China’s leading mobile app marketplaces. And Jennifer Li, Baidu’s chief financial officer said in the Baidu earnings release: “In the quarters ahead, we will continue to invest aggressively in order to position ourselves well in this rapidly developing mobile market.”
No wonder BIDU stock investors were smiling.
Another promising sign from the Baidu earnings report was the company’s fourth-quarter outlook. BIDU revenue for Q4 should be between RMB 9.22 billion and RMB 9.48 billion, which translates to growth of between 46% and 50%.
More importantly, that’s far higher than current analyst estimates for BIDU Q4 revenue. The consensus heading into the report was for RMB 8.9 billion from Baidu.
Be Cautious With BIDU Stock
Still, another solid Baidu earnings report doesn’t necessarily mean it’s time to go out and snatch up BIDU stock. While BIDU is posting sizzling sales growth, the company is only slated to grow earnings around 21% long-term … yet is trading for a whopping 33 times forward earnings.
Sure, BIDU stock investors have a sentiment similar to Amazon (AMZN) investors right now, where sales growth and big-time potential is more important than the current bottom line.
And sure, the Chinese Internet megatrend has the potential to keep lifting Chinese Internet stocks across the board higher.
But BIDU stock already has big-time gains in the books, while its sales growth is set to slow down in coming years. Analysts expect 38% growth in 2013, for example, but only 33% for 2014.
So if you believe in Baidu long-term, wait for a decent pullback. And proceed with caution. It’s unsure just how long BIDU stock investors will tolerate meager earnings growth in exchange for huge revenue gains.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.