Bears Chase Baidu After So-So Earnings
Internet search leader Baidu (Nasdaq: BIDU) can’t seem to do anything right these days, even when it posts quarterly earnings results that look relatively respectable to me. I suspect that the same short-term traders who bid up Baidu’s stock to meteoric heights in the years after its 2005 IPO are now trying to make more money by short selling the company. That’s my best explanation for the 8 percent sell-off in Baidu stock in after-hours trade after it posted its latest quarterly earnings report. If the losses carry into the regular Friday session, Baidu could easily see its market capitalization drop below the $30 billion mark as its stock tests new lows not seen for more than 3 years.Let’s take a closer look at Baidu’s numbers, which actually seem to show a stabilization for China’s advertising market after a sharp slowdown over the past year. Baidu’s results are relatively easy to analyze, since the company is so one-dimensional due to the fact that ad revenues from its core search business make up nearly all of its total.
Baidu’s revenue rose 40 percent to about 6 billion yuan, or nearly $1 billion, in the first quarter, though its profit rose by a much smaller 8.5 percent to just over 2 billion yuan. (company announcement) The 40 percent revenue increase was roughly comparable to the fourth quarter growth rate; but the profit increase was down sharply from a 36 percent rise in the previous quarter, which reflects growing competition in the search space and may partly explain some of the big sell-off after the results came out.
Looking ahead, Baidu predicted that revenue in the current quarter would grow about 37 percent, marking the third straight quarter of growth at that level. While stabilizing growth at 40 percent certainly isn’t as exciting as the triple-digit revenue increases that Baidu used to report, it’s certainly not a bad figure and most companies would be happy to maintain growth at that level.
From a broader perspective, Baidu’s revenue stabilization should come as positive news for advertising-dependent companies like Sina (Nasdaq: SINA), Renren (NYSE: RENN) and Phoenix New Media (NYSE: FENG), since it means that those companies’ own revenues will also stabilize and could start to improve in the second half of this year. Renren shares were up in after-hours trade after Baidu’s results came out, but Sina shares were down slightly.
Moving back to Baidu, the company clearly will have to improve its profit growth in the quarters ahead if it wants to regain investor confidence. That could be difficult, however, as the company is now facing serious competition from Qihoo 360 (NYSE: QIHU) and Sohu (Nasdaq: SOHU) after years of dominating the market with few serious rivals. Baidu also still has yet to dominate the mobile search market, which is likely to equal or even overtake traditional desktop search in the years ahead as more people access the Internet over smartphones.
So, what does the future hold for Baidu? My best guess is the company will remain a favorite of the bears for the rest of this year, as it’s unlikely to return to big double-digit profit growth as it defends its position in desktop search and spends heavily on its mobile business. But it could minimize the sell-off if it can maintain revenue growth at the 40 percent level or even show some improvement. At the end of the day, I do think that 2013 will be a challenging year for Baidu and expect we’ll see more erosion in its share price to perhaps the $60-$70 range.
Bottom line: Baidu’s revenue is likely to stabilize in 2013, but profit erosion and short selling are likely to keep pressure on its stock throughout the year.
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