Shares of Baidu (BIDU 1.37%) are falling out of favor as the third quarter draws to a close. The stock has slipped in five of the past six trading days, shedding 7% of its value along the way.
A big contributor to the slide was a pair of bearish analyst moves earlier this week. Deutsche Bank analyst Alan Hellawell rained on China's leading search engine, downgrading Baidu stock -- from buy to hold -- on valuation concerns. With the stock clawing higher during the summer, it's roughly back to where it was before it had to scale back on its lucrative healthcare ads in May. A cancer patient died after finding a dubious treatment center on Baidu, and regulators cracked down on how sponsored results can be presented on search query result pages.
Baidu has dramatically lowered its guidance since the tweak to the way it handles health-related ads, and it's only natural to wonder if the stock should be trading as high as it was when its near-term earnings power was much higher. Hellawell is getting conflicting opinions on how much advertisers are spending on Baidu's platform these days. He's lowering his price target from $219 to $201.
BofA/Merrill analyst Kok Onn Yong also issued a bearish note on the stock, but at least he already had a sell rating on the dot-com giant. The market has generally rewarded Baidu for its ability to cope with the mobile migration, but Yong feels that Baidu's still relying too much on search and will spend aggressively on growth initiatives that will weigh on bottom-line results in the near term.
We've seen Baidu at the forefront of self-driving cars and artificial intelligence. It's also thrown its weight behind the currently profitless streaming video niche, a business that it was trying to take private earlier this year before being shut down by activists. These are all glitzy categories, but none of these will be material contributors to Baidu's bottom line anytime soon.
Climbing the great wall of worry
Baidu's stock was rolling before trickling lower in the past seven trading days. The shares were moving higher through the summer despite the a flurry of Wall Street pros lowering their price targets following a disappointing quarter.
- Brean Capital went from $220 to $197 on the stock.
- Piper Jaffray analyst Gene Munster slashed his price goal from $215 to $180.
- Oppenheimer's Jason Helfstein tweaked his target price from $196 to $188.
- JPMorgan's Alex Yao assumed coverage with a $164 price. The previous analyst was at $190.
Most of those analysts were bullish, but Yao tagged the shares with an underweight rating. His bearish thesis revolved around advertisers spending money on social media platforms and verticals at the expense of traditional search leads.
This is not Baidu at its best. Its guidance calls for just 5% to 9% in organic year-over-year revenue growth for the quarter that ends today, mostly the handiwork of the healthcare ad cutbacks. The bulls will come back when the fundamentals do, and thankfully for Baidu investors, this is a company that has often bounced back even better when it faces adversity.