Please ensure Javascript is enabled for purposes of website accessibility

Baidu Earnings -- Investing Heavily in the Future

By Danny Vena – Updated May 3, 2017 at 12:57PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Things weren't as bad as the market made out for the Chinese search leader. It's been laying the foundation for a return to growth.

Chinese search leader Baidu, Inc. (BIDU 1.49%) reported earnings for its just-ended quarter, and results were better than expected. Its revenue of $2.45 billion was up 6.8% over the prior-year quarter and was largely in line with expectations. Earnings of $258.1 million were 10.6% lower year over year, but they beat expectations by a wide margin. While online advertising customers were down 23%, the ones that remained spent 27% more as the company works to improve the quality of its advertisers.

This marked the continuation of its recovery as the company moved to clean up its advertisers, as well as marking a period of significant investment in the nascent field of artificial intelligence. Though things were better than expected overall, the stock fell 4% on the news. What's going on? Two things conspired to push the stock lower in the short term.

Baidu Sunnyvale, California campus.

Baidu continues its recovery. Image source: Baidu, Inc.

Stock down on better results?

First, Jennifer Li, Baidu's long time chief financial officer, will be leaving her position to assume leadership of Baidu Capital, the company's investment arm, which will invest in late-stage, venture-backed companies focused on emerging technology. Baidu established this $3 billion fund late last year in a move that will help the company discover new technologies that will fit with its own. This latest personnel change comes on the heels of the addition of Dr. Qi Lu, who assumed the role of chief operating officer and the departure of Andrew Ng, who ran Baidu's AI efforts. The company also recently lost Wang Jin, who headed Baidu's autonomous driving business.

Second, the company provided guidance that fell squarely in the range of analyst's expectations for the current quarter, but the market was hoping for more. This marks the third consecutive quarter of falling revenue, and investors had been hoping for signs of a return to growth.

Clawing its way back

Baidu began the process last year of weeding out dubious advertisers making false or misleading claims -- particularly related to medicine and tobacco. This had been largely unregulated in the past, but it recently came to the attention of government officials who instituted additional oversight. Over the long term, this is a net positive for the company, but it makes for tough comparison in the meantime.

Baidu also announced that it was revising the grouping of some of its business segments to better represent its evolving ecosystem of services. Its Yelp clone and group buying service Nuomi will be consolidated into its core business going forward, rather than reported separately. This comes after the surprise last quarter that Baidu would monetize Nuomi through advertising rather than charging for each transaction.

Baidu's Dueros "Little Fish" Voice Activated Robot.

Baidu's Little Fish voice-controlled robotic assistant. Image source: Baidu, Inc. 

Future focused

Baidu continues to invest heavily in several areas that it believes represent significant future opportunities: artificial intelligence and content. The company has stated that it is moving from "mobile first" to "AI first" and increased its R&D budget 35% over the prior-year period to capitalize on what CEO Robin Li calls "a once in a generation opportunity."

Baidu has been using AI to drive incremental improvements in its flagship search and news feed, while aggressively adding video. News feed daily active users reached 83 million this month, and users are spending more time on its platform. Baidu has also been encouraging content creation on its site, and those users have surpassed 450,000.

Taking a page from other tech giants

Baidu also noted that its news feed added incrementally to its advertising revenue, with exhibitors seeing significant uptake from news feed traffic. This could result in a significant additional source of future revenue.

Baidu announced a deal to add content from American cousin Netflix, Inc. (NFLX 0.77%), though the terms of the deal were not disclosed. Baidu reported improved metrics for its iQiyi streaming video service, partially validating its decision to spend heavily on content. That spending reached over $1 billion in 2016 and $383 million in the quarter, doubling what it spent year over year and equaling nearly 16% of revenue.

At the end of the current quarter, iQiyi sported 129 million daily active users and 490 million monthly active users, and they had consumed 5.7 billion hours of content. By increasing content spending, the company plans to move more users from the ad-supported model to the paying subscriber segment.

The best is yet to come

Baidu has been making all the right moves, from cleaning up its advertisers to investing in an AI-centric world. It continues to build out its ecosystem of complementary products and services and focus on the long term. I like to see management less focused on the quarter and instead have a vision for the future.

Danny Vena owns shares of Baidu and Netflix. The Motley Fool owns shares of and recommends Baidu and Netflix. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Baidu, Inc. Stock Quote
Baidu, Inc.
$119.47 (1.49%) $1.75
Netflix, Inc. Stock Quote
Netflix, Inc.
$241.56 (0.77%) $1.85

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.