The sell-off in Chinese stocks, including search engine operator Baidu (NASDAQ:BIDU), continues unabated. Baidu stock is off by one-third from May highs — and it could be worse. The 33% drop in BIDU stock pales in comparison to 50%-plus plunges at peers like JD.com (NASDAQ:JD) and Sina Corporation (NASDAQ:SINA).
Investors have been looking for a bottom since Chinese stocks entered a bear market back in June. And the coming week could provide a long-awaited catalyst. Several large Chinese companies report earnings, with Baidu earnings first, on Tuesday afternoon. Alibaba (NYSE:BABA) follows on Friday.
The problem at the moment is that it doesn’t look like good earnings will be enough. Trade war and tariff concerns swirling around Chinese (and U.S.) stocks aren’t going away. A blowout quarter from Baidu and, in particular, strong guidance for the fourth quarter could pause the selling. But as I wrote last month, BIDU stock looks like a falling knife. And I don’t think it’s worth trying to catch Baidu stock just yet.
The Earnings Problem for Baidu Stock
It would seem like strong numbers from Baidu on Tuesday, and other Chinese giants over the next two weeks, could at least allow the group to stabilize. Baidu in its Q2 earnings report guided for 23%-30% year-over-year revenue growth in Q3. That includes a roughly three-point headwind from the divestitures of several smaller businesses.
Analysts don’t trust the guidance: consensus suggests just an 18% increase year-over-year. Earnings expectations look very low: the Street is looking for non-GAAP EPS of $2.42, down 35% against Q3 2017 (admittedly a blowout quarter).
So if Baidu can hit its revenue guidance, that alone might suggest that the news isn’t as bad as the Street and the market believe at the moment. And strong numbers might be a reminder that a company growing revenue at 25%-plus is trading for roughly 16x next year’s estimated earnings, and closer to 15x backing out net cash.
But I’m skeptical earnings can turn around Baidu stock — at least for good. Of late, earnings haven’t been enough to assuage investor fears. One need only look at the U.S. market over the past two weeks. Corporate earnings have been strong — yet stocks have sold off.
And for Chinese stocks, that has been true as well — including for BIDU stock itself. The last two Baidu earnings reports have been strong. Gains after Q1 earnings were erased in less than a month. Baidu stock fell hard after the Q2 report, owing to disappointing Q3 guidance, and resumed its sell-off this month. There’s simply too much going on here for one backwards-looking report to change the case that much.
The Concerns Surrounding BIDU Stock
After all, trade war fears aren’t going away. The yuan continues to weaken, which has also played a part in the weakness seen in Chinese stocks.
As I pointed out last month, it’s not just Chinese stocks getting hit, either. Emerging markets around the world have been hammered over the past few months. Even in U.S. equities, there’s a clear ‘risk-off’ trade, with sectors like semiconductors and housing seeing huge declines.
The sell-off in BIDU is largely a sentiment problem. But there are company-specific risks as well. Baidu still operates a search engine in a single-party Communist country. Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) unit Google reportedly is looking to re-enter the country — and provide stiff competition. Investments are pressuring near-term earnings, and more spend may needed to fight off Google.
There’s certainly a case that the sell-off has gone too far. But the other issue, as I pointed out last month, is whether BIDU stock necessarily is the best play on a rebound. I still think NetEase (NASDAQ:NTES) is an intriguing play. And I haven’t given up on JD yet, either.
And so I’m not rushing into BIDU stock, even at the lows. There are simply too many external factors, too ugly a chart and too many potentially more lucrative opportunities for investors who successfully time the bottom. Baidu can help start to change the narrative surrounding Chinese stocks with a big report on Tuesday afternoon. But it won’t be able to fully change the story on its own.
As of this writing, Vince Martin has no positions in any securities mentioned.
