Baidu Inc (ADR) (BIDU) was forced to cut its quarterly revenue forecast because of new ad restrictions and yet the market in BIDU stock recovered in short order.
China’s largest search engine slashed its quarterly revenue target by about 10%. New regulations require that BIDU exclude search results to medical services that don’t meet strict requirements. The move came after a scandal in which a college student underwent bogus cancer treatments from a provider he found on Baidu.
The crackdown on these types of ads is crimping business and there’s no reason to think it won’t continue to impact the top line. Indeed, revenue generated by searches in the medical healthcare category is booming thanks to China’s rapidly aging population.
It’s a significant part of BIDU’s business, analysts say, and the effects will be felt for some time. Here’s Citi Research analyst Alicia Yap in a note to clients:
“Keywords from medical, pharmaceutical and health care related customers contributed about 25% of Baidu’s search revenues … we estimate impact for 2Q16 to be about 7% and impact to 3Q16 and beyond will be about 13.5%. For 3Q16, with a full quarter impact, we estimate about 10% downside risk to the current consensus estimate.”
BIDU Stock Stands Firm
BIDU now projects second-quarter revenue of 18.1 billion yuan to 18.2 billion yuan ($2.81 billion to $2.82 billion), down from its earlier view of 20.11 billion yuan to 20.58 billion yuan.
Importantly, BIDU stock recovered from the bad news in a single session. Perhaps that’s because CEO Robin Li said the decline in revenue was due to “short-term uncertainty.” The company expects medical advertising to pick up as new rules are set and longer term it should help BIDU as users see it as a more safe and trustworthy site.
We’ll see. But given the market’s reaction to the new revenue reality, it doesn’t appear to changed most investors’ minds. It looks like the bulls can rest easy on this one.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
