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Baidu Stock Can Still Get the Last Laugh

By Rick Munarriz – Updated Oct 31, 2016 at 9:08AM

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China's leading online search engine posts mixed quarterly results as regulator-fueled restrictions on medical ads bite into its flagship business.

Image source: Baidu.

As bad as things may seem at Baidu (BIDU -1.88%) these days, it's important to remember that Wall Street was bracing for things to be even worse. The company behind China's leading search engine reported quarterly results that were as flattish as we've ever seen when it comes to Baidu.

Reported revenue declined 0.7% to $2.737 billion. Net income rose 9.2% to $465.2 million. That's bland stuff given Baidu's pedigree, but these quick glances at the top and bottom lines of the income statement are misleading. Baidu deconsolidated its once majority-owned Qunar (QUNR) subsidiary following a stock transaction late last year, so that 0.7% dip pits today's Qunar-less revenue against the prior year's Qunar-padded results. Back that revenue out from a year earlier and Baidu's growth was actually a positive 6.7% during the period, in line with the 5% to 9% in organic revenue growth that it was predicting over the summer.

If that still seems tame considering Baidu's high-octane past, you're right. Another thing we need to consider -- and it's a bigger factor than taking Qunar off its surface results -- is that regulators had Baidu revamp the way it presents health-related ads on its site. Having to purge its site of high-paying ads from lead-hungry treatment centers and other medically related businesses hurts. If regulators stick to their guns on this, we're talking about springtime of next year when the year-over-year comparisons will be fair. 

Duty now for the future

This is a rough time for search in China. It was easy to expect soft results for Baidu after Sogou -- a much smaller search engine run by online pioneer (SOHU 2.86%) -- posted disappointing quarterly results on Monday. Sogou clocked in with just 2% growth, and Sohu's search engine has historically been growing faster than Baidu's since it's so small and early in the monetization process. 

This sluggish growth will pass. This isn't the first time that Baidu's been forced to prune back its Rolodex of advertisers following a health-related advertising scandal. Baidu bounced back in a major way then, and a repeat performance is more than reasonable. 

Baidu's guidance isn't pretty. The $2.675 billion to $2.756 billion that it's targeting represents a decrease of 1.7% to 4.6% when pitted against last year's fourth quarter. The Qunar scapegoat will also start to run dry a few weeks into the period since the deconsolidation took place in late October of last year. The midpoint of the top-line guidance excluding Qunar's role in the fourth quarter of last year is actually slightly negative. Some outlets are misleadingly calling the third quarter Baidu's first year-over-year revenue decline as a public company, but that may be more accurate for the current quarter. 

However, even once Qunar is off the hook, we'll still have until May of next year before we can compare results evenly given the new normal of its health ad restrictions. Baidu doesn't look great right now, but it's not as bad as it seems. 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends 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.

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