Baidu (BIDU), the so-called Google of China, reported lower third-quarter earnings after the market closed on Thursday. Investors, however, were more impressed with strong revenue growth than concerned about weaker income, sending BIDU stock soaring to the tune of 10%-plus on Friday.
What gives?
There’s a method to the madness, so to speak — Baidu is spending big now for even bigger growth later, and the market has faith that the expenditures are money well spent.
The good news for would-be investors is, there’s still time and room to jump into a trade at a decent price.
Baidu Earnings
In its third quarter of 2015, Baidu earned an operating profit of $1.43 per share, topping estimates of only $1.23 per share of BIDU.
It was a figure well below the $1.90 per share the company earned in the third quarter of 2014, but investors weren’t concerned, as they know the money went to a good cause — an investment in the company’s online-to-offline sales effort.
While akin to Alphabet (GOOGL, GOOG) search engine Google in the United States, an investment in BIDU isn’t merely an investment in the middleman that serves up ads for web users to click — Baidu owns or has an interest in some of the businesses benefiting from those clicks.
Perhaps the most prolific of those is Baidu’s stake in a company called Nuomi, which compares to Groupon (GRPN) in the United States, with a hint of Amazon.com (AMZN).
Baidu was a partial owner before, but as of June 30 plans to invest a whopping $3.2 billion in the up-and-coming company, leveraging its position as a middleman to funnel customers to its retail ventures.
Investors like the idea, and well they should. Despite waning net income, revenue growth remains outstanding. The Baidu earnings report posted on Thursday also said the top line grew 36% on a year-over-year basis in the third quarter, reaching $2.89 billion, in line with analyst estimates.
On Other Fronts
While the top- and bottom-line numbers were satisfactory, BIDU investors can also take solace — perhaps even more solace — in the less-discussed metrics not being highly touted — metrics like the fact that Baidu’s average revenue per online customer grew 9.3% (year-over-year) in Q3, following a 3.3% rise from Q2’s total. It’s an improvement that indicates Baidu isn’t merely buying growth, but continues to refine its current product and process the right way.
It’s also worth noting that Baidu unveiled a $2 billion stock-buyback program on Thursday; that’s in addition to the recently completed $1 billion stock buyback.
Perhaps most important, however, is the fact that Baidu continues to carve out market share in the fast-growing mobile search market.
As important as mobile is in the United States, it’s arguably more important in China, and is especially important to Baidu in that it has a vested interest in converting mobile users into paying customers of its goods and services available through venues like Nuomi.
To that end, the 26% increase in the number of people using Baidu to search the web on their mobile devices in Q3 underscores how well the site’s search engine is becoming the centerpiece of the country’s mobile search market.
The fact that 45 million Chinese consumers are now using Baidu’s mobile wallet service also underscores the company’s strength in that space.
Bottom Line for BIDU Stock
There’s not a lot not to like in the Baidu earnings numbers.
Click to Enlarge The only downside is shrinking earnings, but most of the market seems to understand BIDU will have to spend money to make money, and now rather than later (while the mobile e-commerce market is still gelling in China) is the ideal time to do it.
This week’s sizable opening bullish gap left behind early in the week has since been exacerbated by Friday’s big gain. This could present something of a technical headwind until (1) it’s filled, or (2) traders are convinced it’s going to remain unfilled.
Things could be a little volatile in the meantime.
Given the underlying fundamentals though — in addition to the fact that BIDU stock is still well below its late-2014 peak near $250 — there’s plenty of room and reason for the stock to remain in a long-term uptrend … especially now that investors understand where the money is going.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
