Chinese web-search giant Baidu (BIDU) — often referred to as the Google of China — is slated to report its third-quarter numbers after the market closes on Thursday.
If all goes as expected, the company will report a profit of $7.27 per share of BIDU stock, though it’s worth noting the company has missed estimates in two of its past three quarters, and is known to be spending heavily now to secure big growth later.
Indeed, that may well be the make-or-break issue for Baidu shares come Friday morning … will the spending be worth the long-term potential it creates, or will traders view BIDU stock as too great of a liability to justify its lofty price?
Baidu Earnings Outlook
As was noted, Baidu is projected to post a profit of $7.27 per share on Thursday, after the closing bell rings. The figure doesn’t compare favorably to the year-ago bottom line of $11.00 per share of BIDU stock.
It’s not waning sales driving earnings down, however; the estimated third-quarter 2015 top line of $18.39 billion is 36% higher than the year-ago revenue total of $13.52 billion, and that growth pace has been the norm for several years now.
Rather, it’s heavy capital spending to secure future growth that’s weighing in on earnings now.
In June, Baidu said it would be spending $3.2 billion over the course of the next three years as part of an effort to beef up its online-to-offline (or O2O) revenue. For perspective, Baidu earned net income of $2.13 billion in 2014, making that $3.2 billion in planned expenditures a good-sized chunk of change for the company.
Although Baidu didn’t explicitly say when or how it would deploy that $3.2 billion, the basic consensus is that it will be sooner than later. Company executives haven’t offered any insight to suggest otherwise either. For example, spokesperson Kaiser Kuo recently noted in an e-mail that the spending “will tend to be front-loaded, as this is the critical period when we’re really competing to grow our users and shape market behavior.”
Analysts’ forward-looking earnings outlooks for weaker numbers also imply these capital expenditures will be more near-term than down-the-road.
Three Things for BIDU Owners to Mull
Like all stocks, BIDU stock is a multifaceted holding that can be pushed around by a variety of factors. Three key items weigh more heavily on investors’ minds than the rest do right now, however. These are:
- Online-to-offline (O2O): For those unfamiliar with it, O20 is a business model aimed at extracting more revenue from an internet user by converting them to a brick-and-mortar buyer. In many regards, most e-commerce efforts are online-to-offline in nature, but only in the sense that retailers and service providers use web advertisements to drive sales. Baidu is striving on several fronts to also be the retailer. Case in point: The $3.2 billion set aside for growth investments? All of it being used to purchase the remainder of Nuomi — an e-commerce website not unlike Groupon (GRPN) — Baidu doesn’t already own.
- Mobile: It’s been understated as much about China’s mobile market as it has regarding the United States’ mobile user base, but web searches in China are increasingly done mobile devices. Unlike Alphabet (GOOGL, GOOG), though, Baidu has been ready for this paradigm shift; more than half of its revenue already comes from its diverse array of mobile-based products. The question is, can Baidu continue to grow as it has in the recent past in an increasingly competitive mobile world?
- Consolidation: While it may or may not be further detailed (or even discussed) during the conference call, the lines between China’s internet companies are being blurred as more and more unlike businesses intertwine themselves with one another. Outright ownership of Nuomi is one way Baidu is making it happen, but not the only way. The company also recently announced that Qunar (QUNR) — an online travel agent largely owned/controlled by Baidu — would be swapping stock with rival travel agent Ctrip.com (CTRP), giving Baidu a 25% controlling interest in Ctrip. To what extent might Baidu be planning horizontal as well as vertical expansion?
Bottom Line for BIDU Stock
Growth has never been an issue for BIDU stock, and for that matter, earnings haven’t been either. Its earnings-growth penchant may be about to change for a bit, however, as it starts to spend big now for a much bigger and better top line in the future.
Although the planned expenditure is a smart idea from a company that’s proven (like Alphabet/Google) that it knows how to spend effectively and maintain market share, it remains to be seen if investors will see it the same way once they actually see weaker earnings numbers in print … especially knowing analysts don’t have any idea exactly how much of that $3.2 billion was shelled out last quarter.
This may be one that merits extreme caution, before and after the Baidu earnings news.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
