Congratulations to anyone who owned Baidu Inc (ADR) (BIDU) as of Thursday’s close. Heading into the company’s fourth quarter earnings reports, pessimism regarding the company’s future growth could have easily set up a glass-half-empty scenario for BIDU stock, but the market latched into the positives instead, sending Baidu shares up 10% on Friday.
A reason for a newcomer to buy? The jury’s still out on the matter.
Traders continue to chat about the inevitable slowdown in growth that tends to surface after years of strong double-digit growth — there are only so many dollars (or renminbi, in this case) that can be feasibly won by Baidu.
But it looks like the market is coming to terms with that reality, as it dismissed BIDU’s disappointing Q1 outlook and instead focused on the compelling things it’s doing to secure its place as China’s dominant search engine and digital middleman.
Baidu Earnings
Truth be told, last quarter’s numbers from Baidu weren’t particularly impressive.
Revenue of 18.69 billion RMB ($2.88 billion) topped expectations for a top line of 18.54 billion RMB, and the revenue total was up 33% from year-ago levels. However, its earnings of $1.18 per share fell a penny short of the $1.19 EPS analysts had been calling for. Worse, revenue guidance for the current quarter rolled in at a range of 15.4 billion to 16 billion RMB, versus analyst estimates of 16.3 billion RMB.
Perhaps even more alarming is the fact that last quarter’s sales growth was the slowest it has been in over seven years, and that growth pace is expected to continue shrinking as time passes. Its revenue outlook for Q1 represents a growth rate of between 29% and 32%.
It’s still impressive, but very un-Baidu-like.
Why the Buying?
Not that revenue growth on the order of 30% is anything to be ashamed of, but calling a spade a spade, investors tend to think in relative terms rather than in absolute terms; if growth is slowing, it usually presents a bearish problem.
So how has BIDU stock escaped that typical fate? In simplest terms, the market understands what Baidu is doing, and has faith that it’s the right thing to do.
At the very least, Baidu has still managed to keep the bulk of its potential competitors at bay, accounting for 80% of China’s Internet search market. Granted, the country’s government has helped keep foreign players like Google out of the picture, but Baidu has fended off the likes of Qihoo 360 Technology Co Ltd (QIHU) and Sogou on its own.
The real draw to Baidu today, though, is better than expected traction with its important online-to-offline (O2O) effort designed to make the most of China’s transition to a highly mobile Internet market. The number of mobile monthly active users was up 21% on a year-over-year basis, to 657 million, which confirms that whatever Baidu is doing to capture its share of the fast-growing mobile market in China is working. Mobile ad revenue made up 56% of its total revenue last quarter, versus 42% in the same quarter a year earlier.
It has not been cheap growth, mind you. Selling things like movie tickets and meals via smartphones reduced the company’s operating margins by a little more than 30 percentage points last quarter; online marketing spending grew 27% in Q4.
However, the company views the expense as an investment in the future. As Chairman Robin Li explained in an interview with BloombergBusiness:
“On mobile we can be more targeted. We know more about the user, we know the location of the user and we can enable all kinds of user actions … The nature of the queries on mobile are more toward local services, which inherently have more commercial value.”
His phrase “more commercial value” requires a footnote: On a per-view basis, mobile ads don’t pay as well desktop or laptop ads. Volume is the key.
Still, if nothing else, Baidu’s success on the mobile front has silenced many of the naysayers who felt the company wouldn’t be able to compete with other players who were garnering more market share than Baidu was just a few months ago. One could also subjectively argue that Baidu is also just better at converting online browsers to offline buyers than rivals like Alibaba Group Holding Ltd (BABA).
Bottom Line for BIDU Stock
While Baidu won a key battle last quarter, and is riding the euphoria wave today, that may not be the case tomorrow … or any day after that.
Simply put, Baidu is in a catch-22. Investors love the fact that it shed its loss-making travel website Qunar, but owners of BIDU stock aren’t all that accustomed to seeing it spend so heavily on growth. Investors were willing to look the other way this time around because progress was so palpable. However, if the company has to perpetually spend heavily to maintain growth in the mobile market, traders could easily see the glass as half-empty the next time around.
There may be better risk-versus-reward scenarios out there until Baidu figures out how to get more bang for its investment buck.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
