Chinese tech company Baidu Inc (ADR) (NASDAQ:BIDU) has been called “the Google of China,” but BIDU stock’s steady decline over the past six months suggests that the company is nowhere near comparable to Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL).
In mid-February, BIDU looked to be on the upswing, but the firm’s fourth-quarter earnings dealt a heavy blow to Baidu stock.
With BIDU shares down nearly 10% from where they were a month ago, however, this dip could translate into a buying opportunity.
It’s true that Baidu reported less-than-stellar earnings last month. The company’s quarterly revenue came in a $2.6 billion, which represents a decline of more than 2% from last year’s figures.
Even more concerning was the fact that online marketing customers declined 18.6% in 2016. For investors that consider BIDU to be the Chinese Google, that’s a huge deal. Advertising dollars are everything to search engines like Baidu and Google.
It’s Not as Bad as It Looks
Those figures are certainly scary, but when you look at the reason behind them things start to look a little bit rosier. It’s important to note that BIDU faced some major headwinds last year, including a big change to China’s advertising regulations. The cost to comply with the new rules was significant for Baidu, which generates around 96% of its revenue from advertising.
Not only did the new regulations hit BIDU’s revenue hard, but they also hurt the firm’s customers numbers. The new regulations include strict rules regarding how companies advertise and some of Baidu’s current customers weren’t able to meet those requirements, which resulted in a loss.
However, there could be a silver lining in there for BIDU as the new requirements will help the firm identify who its quality customers are. If you look at per-customer spend, you’ll see that those who were able to meet the new guidelines actually spent about 14% more than they had in the fourth quarter of 2015.
Huge Growth Potential for BIDU Stock
What’s important to note here is that even if BIDU is struggling now, there is a huge growth opportunity for internet companies in China. While you might think that a search engine doesn’t have room to expand any further, keep in mind that China is pretty far behind the U.S. when it comes to internet users. Just over 50% of the nation’s population has access to the internet.
That’s a big deal, because it means that as the internet makes its way further afield, advertisers are going to be willing to pay to reach even more people. Eventually, online advertising will be the best way to reach the majority of Chinese residents, and marketers will have to pay for that.
Bottom Line on BIDU Stock
Not only does BIDU have a lot of growth potential in its core business, but the firm has been investing heavily in hot new technology like artificial intelligence and self-driving vehicles. While advertising revenue still makes up the bulk of Baidu’s bottom line, we could see big-time benefits from the firm’s focus on the future.
The company’s efforts to develop self-driving technology are particularly enticing because the cars’ navigation systems will be equipped to deal with China’s complicated traffic conditions. That means that once the vehicles are roadworthy, tweaking their technology to make them usable on U.S. roads will be far easier than trying to do it the other way around.
BIDU’s fourth-quarter results were definitely scary on the surface, but things aren’t as bad as the market would have you believe. If you have ever considered buying BIDU stock, now is the time to do it.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.