Baidu: Breaking Bad

Baidu (NASDAQ: BIDU  ) will have to try harder if it wants to win back its status as the dot-com darling of China. The leading Chinese search engine fell short in its latest quarter. Revenue soared 40% to $961 million, but analysts were hovering around the $969 million mark. Profitability inched 9% higher to $328.9 million -- or $0.95 a share -- but Wall Street was expecting a profit of $1.03 a share.

One can argue that 40% revenue growth is great, and that Baidu's final figure was smack-dab in the middle of its earlier guidance. Dividing $961 million in revenue by $328.9 million in earnings to arrive at net profit margins of 34.2% is a figure that would make most stateside Internet companies drool with envy.

Unfortunately, it's just not good enough. Baidu has been so much better in the past, and this is the second quarter in a row that Baidu has disappointed on the bottom line.

Is it a coincidence that Qihoo 360 (NYSE: QIHU  ) rolled out a rival search engine last summer and that Baidu has come up short in each of its first two reporting periods where it had to compete with Qihoo 360 for the entirety of the quarter?

The stock initially moved lower on the Thursday night report, and rightfully so. A miss is a miss.

However, Baidu's guidance for the current quarter calls for a strong sequential bounce, with $1.187 billion to $1.216 billion in revenue. That finds analysts planted in the middle at $1.2 billion. The problem here is the mystery meat that Baidu's profitability will be. The Chinese bellwether doesn't provide bottom-line guidance, but the recent slide in margins is problematic. Bandwidth, content, and SG&A costs all grew a lot faster than revenue at Baidu. There's little reason to expect that to change in the near term.

Baidu is now trading at a trailing earnings multiple in the teens, and that's true on a forward basis even as analysts tweak their full-year forecasts.

Yes, Baidu used to be better, but the stock has also never been this cheap. There's plenty to prove at Baidu, but the future isn't as bleak as the market's reaction would seem to suggest.

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  • Report this Comment On April 25, 2013, at 6:15 PM, bobo543 wrote:

    Every other week for months and months the Motley Fool says what a deal BIDU is for reason A, B, and C. Only problem is it keeps going lower and lower. Oops here's another earnings miss but no worries BIDU is still a quality company no worries. If you guys actually looked at a chart you'd see BIDU topped in 2011 and has had lower highs and lower lows every month since then. This is why fundamental research doesn't work: the fundamentals say its cheap and it just keeps getting cheaper and cheaper while stocks like NFLX have PE's over 700 and just keep going up.

  • Report this Comment On April 25, 2013, at 10:08 PM, dododaddy wrote:

    MF has been shamelessly shilling Baidu like a penny-stock pump and dump rag for as long as I've subscribed to its service (among many other stocks). In the same breath, they hammer Qihoo for their nefarious business practices.The next Google?!? A bit presumptuous,perhaps? Let's remember our history, shall we? Remember Netscape? Lycos? The ever-changing landscape of American internet as preferred services and providers was constantly changing? And the Foolish hucksters cramming Baidu down our throats as though their family fortunes depend on it! It's a bit naive or self-serving to suggest one, and only one internet company will rule China for all eternity? Come on now....

  • Report this Comment On April 27, 2013, at 1:07 PM, crca99 wrote:

    Appreciate the perspective, the reminder to keep an eye on margins, and the writing style...always like that.

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9/17/2014 4:00 PM
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