Baidu Inc (ADR) (NASDAQ:BIDU) stock took a hit Thursday, with shares losing as much as 7% after weak fourth-quarter earnings and an outlook that disappointed.
Even before today’s plunge, the high-flying growth stock — frequently dubbed the Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) of China — had been feeling the pain. Through yesterday, BIDU stock was down nearly 6% in 2015 already.
BIDU and Its Unique Problem
Baidu has a unique problem. Basically, the Chinese search engine giant is too good at mobile. Mastering mobile in some form or fashion is the dream of tech companies around the world, from Facebook Inc (NASDAQ:FB) and Apple Inc. (NASDAQ:AAPL) in the U.S. to Baidu rivals Alibaba Group Holding Ltd (NYSE:BABA), Tencent Holdings ADR (OTCMKTS:TCEHY), and Qihoo 360 Technology Co Ltd (NYSE:QIHU) in Asia.
Mobile revenue came in at 50% of total revenues in December, 42% in the fourth quarter, and 36% the quarter before.
The only problem? Mobile traffic is much harder to monetize than PC traffic. People prefer to comfortably browse from the coziness of their home on a large, easily navigable screen; buying something on a device that fits in your pocket while you’re shoulder-to-shoulder in a subway car is naturally less appealing.
Traffic acquisition costs also rose last quarter to 13.4% of revenue, 110 basis points above the 12.3% of revenue BIDU spent on traffic costs in Q4 of 2013.
So even while BIDU stock was shielded from some losses by strong revenue growth (44%) that beat expectations, margins disappointed and Baidu missed badly on earnings — posting EPS of $1.45 vs. consensus estimates for $1.59 in the quarter.
Baidu’s Future: Rife With Opportunities, Challenges
The BIDU stock price could easily remain pressured in the near-term as investors worry over margins. The company itself warned that first-quarter results won’t be anything to write home about due to where the Chinese (or Lunar) New Year falls in 2015.
The Chinese New Year begins on February 19 this year, and lasts for 15 days. The Wall Street Journal quoted BIDU CEO Robin Li, who cautioned financial analysts on a conference call about the implications of the holiday’s timing:
“Probably one month before the Chinese New Year and the two to three weeks after, people are on the go…. They will use mobile to do search instead of PC.”
In other words, because mobile monetization is so difficult — advertisers’ cost per click rates on mobile are just 60% of rates for the PC — revenue growth will be pressured. BIDU now expects revenue growth between 33.2% and 37% in the first quarter, a far cry from the 42% consensus estimate.
The good news for investors is Baidu’s focus on the future. Research and development costs surged 69% last quarter, showing BIDU’s commitment to investing in the future. Its recent $600 million investment in the ride-hailing app Uber also shows Baidu’s focus on growing its mobile payments platform, Baidu Wallet, although Uber’s purported $40 billion valuation at the time of the investment doesn’t give BIDU a meaningful stake.
BIDU stock can give investors exposure to a company doing a lot of things right in mobile. Unfortunately, that success is both a blessing and a curse.
As of this writing John Divine owns shares of GOOG stock, GOOGL stock and AAPL stock. You can follow him on Twitter at @divinebizkid or shoot him an email at editor@investorplace.com.
