Chinese search engine giant Baidu (BIDU) exceeded estimates with an impressive earnings beat for its third quarter. BIDU’s revenue and earnings both surged, led by a strong performance in mobile search, a major area of emphasis for Baidu and an area of investor focus on BIDU stock.
Despite the big gains in revenue, some investors expected even more from Baidu, so BIDU stock sold off in Wednesday’s after-hours trading. But the market digested the news more positively Thursday and saw what we see — that BIDU stock still is attractive for long-term investors as it strengthens its hold in mobile search.
Mobile the Key
Baidu’s adjusted earnings of $1.90 per share were up more than 27% year-over-year beat earnings expectations of $1.55 to $1.62. Meanwhile, revenues of $2.2 billion were up 52% but just came in line with the analyst consensus.
The driver of Baidu’s strong performance was mobile, which accounted for 36% of the company’s total revenue. According to Baidu CEO Robin Li, mobile traffic has now outstripped PC traffic. Mobile has been the focus — some would say obsession — of Baidu in recent years, as it has been the task if not the mission of Baidu to follow the migration as users have become more and more untethered from their desktop PCs.
Baidu was once regarded as a bit slow to the mobile party, so Baidu’s ability to transition fully into mobile has been on the market’s mind the last several earnings reports.
As for the market’s reaction to the earnings, BIDU stock had been on something of a run recently, as it traded under $200 on Oct. 14, but nearly touched the $229 level on Oct. 28, the day before the earnings report. Whether the earliest traders (who sold off before the day) were merely taking profits or were dissatisfied with the headline numbers is up in the air.
A Deeper Look
Although mobile has been the mission at BIDU and has been a question mark for many in the market, Baidu is answering the question well. One cautionary note contained in Baidu’s report, though, was in the expenses — specifically, the spending to gain a greater foothold in the key mobile market.
BIDU spent $439 million on promotional spending for mobile, a 95% increase from last year’s same quarter. Spending is legitimate of course to gain market share, and fine as long as there is profitability. It’s not hard to see, however, that investors don’t want that spending to grow out of bounds. Chinese internet stock Sohu (SOHU), for example, comes to mind as a company that has been spending without a lot to show for it in recent quarters. This goes along with the recent howl in the market over Amazon (AMZN) earnings (or lack thereof).
The Search Battle
Often referred to as “the Chinese Google (GOOG),” BIDU has been battling upstart Qihoo 360 (QIHU) on the search front in China. In the showdown between Baidu and Qihoo, QIHU stock became something of the market darling, as the younger entrant captured nearly 30% of Chinese search.
But in the case of mobile search, BIDU is crushing it with an 80% market share. Baidu more than answered the bell on the fight for mobile search.
Something also should be said about potential investor reluctance when it comes to any Chinese stock. Given the history of accounting scandals at some Chinese companies as well as the arcane Variable Interest Entity structure of many Chinese companies, including BIDU, U.S. investors naturally can get a bit nervous.
While not dismissing these concerns, to paraphrase legendary investor Peter Lynch, there’s always something to worry about.
Yet companies such as Baidu have established a track record worthy of earning the market’s respect. Extreme China bears will disagree, but it’s hard to argue against the returns Baidu has created for investors over the years.
Oppenheimer recently upgraded BIDU stock to a “buy” with a price target of $280. Although near-term trading in the market will focus around the earnings report, traders with a longer time horizon will be more interested in the upgrade.
BIDU stock does have a history of some explosive moves, so it’s worth watching that way. Longer-term growth investors should be cautious, though, of buying on momentum unless they are used to doing this.
For those of us who are leery of chasing prices, we’ll be looking for a pullback. Historically, there have been many moments of such opportunity for investors, even as BIDU has risen.
As of this writing, Greg Sushinsky was long BIDU, GOOG, SOHU.