Following choppy trading throughout the Tuesday morning session, Chinese internet and technology firm Baidu (NASDAQ:BIDU) is managing to swing into the green this afternoon. Earlier, the company posted encouraging results from its third-quarter earnings report, suggesting a broader tech recovery in China. However, the country’s Covid-19 policies and other macroeconomic pressures are clouding wider enthusiasm for BIDU stock.
By pure numbers, Baidu’s performance provides hope for market optimists that the worst of China’s downturn is fading. First, the company posted revenue of $4.57 billion, up 2% from the prior-year period according to Barron’s. That tally beat Wall Street’s consensus sales target of $4.46 billion.
Notably, online marketing revenue did slip 4% from the prior year to $2.63 billion, mostly due to Covid-19 restrictions. Nevertheless, Baidu mentioned that the unit’s revenue improved sequentially from Q2 because of gradual improvements in the economic environment.
On the bottom line, Baidu posted non-GAAP earnings per American depositary share (ADS) of $2.37. This figure beat the consensus target of $2.15. According to Bloomberg, Baidu’s cutting costs efforts also helped prop up profitability metrics.
Nevertheless, Baidu remains committed to diversifying its product portfolio. As Bloomberg notes, overreliance on digital marketing could leave BIDU stock vulnerable to future economic shocks. In Q3, Baidu’s non-online marketing revenue — which included contributions from its artificial intelligence (AI) and cloud computing units — gained 25% year-over-year (YOY).
Macro Worries Still Stymie BIDU Stock
Although BIDU stock has enjoyed significantly positive momentum in recent sessions — gaining more than 19% in the trailing month — investors largely feel skeptical about the underlying business. Since the start of the year, Baidu’s equity value has plunged more than 35%.
At the heart of the anxieties toward BIDU stock is China’s attitude toward Covid-19. Contrasting sharply to many other nations that have fully reopened, the Chinese government insists on its notorious zero Covid policy.
Recently, rumors did circulate that Beijing would relax its pandemic-related mitigation protocols, thus possibly paving the way for a full reopening in China in 2023. Unfortunately, though, the latest news suggests that the country could resume its stringent policy. Additionally, ABC News reports that Chinese authorities announced China’s first Covid-19 death in nearly six months. Naturally, this dynamic bodes poorly for the nation’s economic recovery efforts, which in turn hurts BIDU stock.
Another factor to consider here is international competition. In October, neighboring Japan reopened to foreign tourism. A key catalyst for rising demand for travel to Japan is the weak Japanese yen. Unlike other central banks, the Bank of Japan has kept interest rates low.
However, by the time China reopens, global economic circumstances may have changed. Given legitimate fears of a worldwide slowdown, it’s possible that Japan and other popular tourist destinations will have soaked up the low-hanging fruit of consumer discretionary funds. This could also apply pressure on BIDU stock down the line.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
