There's a lot riding on Baidu (NASDAQ:BIDU) this week, as China's leading search engine provider gears up for an important financial announcement. Baidu reports results for its third quarter after Thursday's market close, and it's understandable if investors are nervous.
Baidu has been feeling vulnerable lately, and that's only going to intensify as we head into tomorrow afternoon's report. Let's go over three reasons why bulls may be feeling a little nervous ahead of the report.
1. Sogou fell short earlier in the week
Sohu.com (NASDAQ:SOHU) saw its stock take a hit after posting disappointing quarterly results on Monday morning. Sohu and Baidu used to champion two entirely different models, but as Sohu's brand advertising and online game businesses continue to sputter, search has become the dot-com pioneer's biggest segment.
Sohu's Sogou posted a mere 2% year-over-year growth in revenue, the search platform's weakest period of growth. Sohu has been subjected to the same restrictions in displaying health-related ads that Baidu has been facing since May, and this is the first full quarter under the new normal.
Sogou is much smaller than Baidu, but it's been growing at a headier pace. Sogou's 19% year-over-year growth during the second quarter was nearly double the 10% uptick that Baidu scored during the same three months. Sogou's revenue climbed 53% last year, besting Baidu's overall 35% growth. If Sogou's revenue climbed a mere 2% since the prior year's showing it will be hard to see Baidu's business posting positive growth.
2. Health ad restrictions make things blurry
Wall Street pros are forecasting $2.8 billion in revenue for the quarter, 4% lower than a year earlier. They also see earnings clocking in at $1.11 a share, 22% below where it was a year earlier. That may not seem so bad in light of Sohu's engine growing at a mere 2% clip, but Baidu's guidance this summer was actually for 5% to 9% in organic top-line growth. The deconsolidation of its online travel business is what's leading some to bet on a slight dip on the top line.
If search is weak -- and that's not an outrageous notion -- we can be seeing reported revenue slip a bit more than 4% at Baidu. Falling short of its own forecast would also eat at the internet giant's reputation with investors. It has historically offered up weak guidance that it can easily beat, but it may have bitten more than it could chew this time around.
3. It's all about guidance
There have been plenty of companies that have offered up mixed quarterly results this earnings season, only to see their stocks get trashed after following that up with a problematic outlook. Baidu's guidance for the third quarter was offered just as it was starting to feel the pinch of health-related spots, but now it has a broader feel for the ramifications of paring back the number of high-paying medical ads it can display on its site.
It won't be a surprise -- to anyone but bulls with blinders -- if Baidu follows up a ho-hum third quarter with an iffy forecast for the fourth quarter. If Baidu is turning to profitless endeavors to grow revenue at the expense of margins, an already challenging situation can get a whole lot worse.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends Sohu.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.