Here’s the understatement of the week: investing in Chinese companies over the past few months has been painful. Stakeholders for internet giant Baidu (NASDAQ:BIDU) can commiserate. Last year, Baidu stock tanked nearly 33%, effectively neutralizing — or neutering — the potential seen during 2017’s robust bull run.
Naturally, most shareholders decided to run for cover. If holding onto relatively stable American companies didn’t make sense, their volatile Chinese counterparts obviously didn’t fare better. Unsurprisingly, the markets’ adventurous folks advantaged the weakness. Since the second half of 2018, short interest in BIDU stock dramatically spiked.
As a result, InvestorPlace feature writer James Brumley astutely noted that its latest fourth-quarter 2018 earnings report was crucial. Although Baidu stock benefits from its dominant search engine and its myriad lucrative opportunities, Brumley articulated investors’ central question: what are you doing in the meantime?
Fortunately for those long BIDU stock, the Chinese tech firm delivered the goods. BIDU beat the consensus estimate for earnings per share, amassing $1.92 per share against the $1.79 target. Additionally, management rang up $3.96 billion in revenue, exceeding the consensus calling for $3.88. Year-over-year, this tally represented 28% sales growth.
Even more comforting, the specific details should bolster sentiment towards Baidu stock. According to CEO Robin Li:
“The growth rate of Baidu App DAUs has been accelerating over the past year, up 24% year over year to 161 million in December 2018, while Haokan short video app grew to 19 million DAUs from 1 million a year ago.”
If we’re just taking these numbers at face value, we have no reason to doubt BIDU stock. However, complex political and social underpinnings cloud the internet giant’s prospects.
While I’m not dissuading anyone from BIDU stock, it’s worth considering the risks.
‘Americanized’ User Base Possibly Threatens Baidu Stock
As usual, Brumley lays out an excellent roadmap for those interested in BIDU stock. Honestly, I have nothing much to add aside from one of his points: Baidu’s moneymaker is the search-engine advertising business, but draconian government oversight threatens this pivotal revenue channel.
At first glance, this cyber-police crackdown inherently offers a mitigating effect. It’s not just Baidu stock absorbing the unwanted attention. Rather, the Chinese government also targeted rivals such as Sohu.com (NASDAQ:SOHU) and Tencent (OTCMKTS:TCEHY).
Historically, crackdowns in China are nothing new. It remains a communist country with totalitarian tendencies. That said, Tencent’s WeChat app — the “backbone” of Chinese millennial modernity — presents a stark case regarding conflicting ideologies and how that could damage tech firms like BIDU.
As South China Morning Post’s Laurie Chen reported, Chinese youth have left WeChat in droves. The reason? Parent company Tencent disclosed that they hand over user data to authorities when required legally.
Logically, this circumstance recalls Facebook (NASDAQ:FB) and its litany of privacy controversies. Moreover, many Chinese millennials refuse to submit to government totalitarianism like their parents’ generation. Like their American counterparts, they’re fighting back by leaving WeChat.
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One of the central problems is that China’s millennial culture is that they’re unlikely to take crap, bluntly speaking. Increasingly, Chinese students have made their presence known in American universities, so much so that it’s creating huge geopolitical rifts.
During their four-plus years stateside, typically liberal professors indoctrinate students with the “American way.” Based on WeChat’s peaking growth curve, that individualistic indoctrination conflicts sharply with China’s historically conservative culture.
Unfortunately, the potential collateral damage threatens Baidu stock.
A Worthwhile Gamble in BIDU Stock
Given what I just discussed, the prospects for BIDU stock now appear decidedly negative. Perusing international news, the Chinese communist party shows no sign of acquiescing to western progressivism.
On the flipside, China has reached a point where they can’t willy-nilly antagonize its citizenry. As I mentioned last year, Chinese workers have voiced their displeasure at their own government for the trade-war related pains. Such vocal criticism was unheard of a generation ago.
Plus, GDP growth in the world’s second-largest economy has slowed conspicuously. Therefore, the government must make a choice: impose their ideology or support their still nascent capitalism. Ultimately, the communist hardliners can wax poetic all they want: money talks and bovine waste walks.
Don’t be surprised, then, that these internet and social-media crackdowns wane, if only for broader economic sustainability.
Finally, I find encouragement with the current technical stability in Baidu stock. With all the short interest pressuring shares, BIDU has held firm. Now armed with a positive earnings result, the company solidified its nearer-term outlook. Therefore, a patient position now could yield strong profitability later.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
