By most accounts, Baidu Inc (ADR) (NASDAQ:BIDU) should be down today, but it’s not. BIDU stock is up, and up decidedly, gaining nearly 4% for the day so far.
Yes, the so-called “Google of China” beat its earnings estimates for the recently completed third quarter. But the bar was set low — the Chinese search engine still reported its first-ever decline in quarterly revenue, and said things would get worse before they got better.
The prod for the unlikely bullishness, then?
To a small degree, hope that the headwind would be short-loved. To a larger degree, Baidu is showing growth where it really counts.
Last quarter, the Chinese search engine (among other things) earned an impressive $1.49 per share, versus expectations of only $1.08 per share of Baidu stock. Non-GAAP net income was up 6.3% on a year-over-year basis, and sales of $2.74 billion topped estimates of $2.7 billion.
The top line was still down almost 1%, however — the first time in the company’s history year-over-year revenue has slipped.
Baidu’s third-quarter sales struggle is largely a reflection of new internet advertising rules. These rules were put in place by Chinese regulators earlier this year after a young man sought information about treatment options for his particular cancer using the Baidu search engine. His search yielded an advertisement that wasn’t clearly identified as such, and as it turns out, may not have been his best therapy choice. His death not only sparked outrage — it prodded sweeping changes in the way healthcare ads are handled in China.
It was no small matter for Baidu, and by extension, it was no small matter for BIDU stock holders. Healthcare advertising up until that time accounted for roughly a fourth of the search engine’s ad revenue. The number of advertisers Baidu served during the quarter fell 11% from a year-earlier, to only 524,000.
Encouraging News for Baidu
And yet, even beyond the impact of tighter regulations, there’s something of a silver lining to this particular cloud.
As it turns out, taking Qunar out of the picture, Baidu’s revenue actually grew nearly 7%.
Qunar was partially owned by Baidu, but last year essentially exchanged its stake in the online travel agent to a stake in rival OTA Ctrip.Com International Ltd (ADR) (NASDAQ:CTRP), putting Qunar in arguably better hands than it was in as part of the Baidu family. Although the echoes of that disruption are still ringing, Ctrip and Baidu have maintained an amicable relationship. Baidu CEO Robin Li hopes that hands-off partnership with partially owned Ctrip.com will serve as the model for deals in the future.
It’s also noteworthy that BIDU continued to cultivate a strong mobile presence, as China — just like the United States — is becoming a mostly mobile market.
The evidence: The number of consumers that used Baidu’s mobile search engine at least once per month grew 3% year-over-year, to 660 million. Mobile map usage was up 7% last quarter. Perhaps more telling than any other measure of progress on the mobile front, however, is the 99% increase in the number of consumers that have activated Baidu’s digital wallet.
Along these lines, some also suspect Li is looking to shed its stake in offline-to-offline outfit Nuomi, which has proven to be an expensive headache.
Looking Ahead for BIDU Stock
In spite of the encouraging progress on the mobile front, Baidu conceded that new advertising rules would take a bigger toll in the quarter currently underway than they did in the prior quarter. The company anticipates Q4’s revenue will roll in between $2.63 billion and $2.71 billion, down anywhere from 2% to nearly 5% on a year-over-year basis. Analysts were collectively expecting $2.89 billion worth of sales for the fourth quarter.
That should be the worst of any headwind, however. Li explained:
“We expect the most pronounced impact on our business in the fourth quarter followed by recovery early next year.”
In the meantime, Baidu continues to cultivate its artificial intelligence project and self-driving cars. Those efforts aren’t expected to add to the value of BIDU stock anytime soon, but they will eventually.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.