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Baidu Stock Has a Lot to Prove on Thursday

By Rick Munarriz - Oct 24, 2017 at 11:18AM

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The dot-com darling is hitting new all-time highs just as it heads into this week's pivotal third-quarter report.

We should be back to seeing Baidu (BIDU 1.86%) at full strength on Thursday when it reports its financial results for the third quarter. Investors are holding out for a period of strong growth. Back in July China's top search engine was targeting $3.412 billion to $3.503 billion in revenue for the quarter, 27% to 30% ahead of the prior year's showing. Back out Baidu's no longer relevant mobile gaming business and we're looking at an organic top-line spurt of 29% to 33%.

Baidu doesn't provide bottom-line guidance, but analysts are holding out for adjusted earnings soaring 57% to $2.03 a share. That may seem like a heavy lift, but Baidu's staying a big step ahead of the prognosticators. It has beaten Wall Street profit targets by a double-digit percentage margin every single quarter over the past year. 

Baidu homepage on a PC.

Image source: Baidu.com.

Back in action

The third quarter should be Baidu's heartiest period of growth since late 2015. Baidu's business was tripped up in the springtime of last year after the unfortunate yet well-publicized death of a cancer treatment seeker who found a questionable and ultimately ineffective medical center through the search engine. The incident prompted regulators to scale back the aggressive display tactics of medical-related sponsored listings on Baidu and rival platforms. The new restrictions kicked in during May of last year, and the year-over-year comparisons have been rough through the past five quarters. Baidu finally lapped the rollout of the restrictions midway through the second quarter, making this Baidu's first true period of year-over-year growth since the first quarter of 2016. 

Expectations are understandably higher now that Baidu should be back in high-growth mode. The shares have soared 32% since Baidu came through with well-received second-quarter results three months ago, and that was with a mere 14% year-over-year uptick in revenue. Baidu stock has skyrocketed 62% this year, hitting fresh all-time highs just last week. 

Analyst moves just ahead of Thursday afternoon's report have been encouraging. TH Data Capital upgraded the shares from Hold to Buy on Monday. Last week it was Gregory Zhao at Barclays sticking to his neutral Equal Weight rating but boosting his price target from $210 to $250. Zhao feels the stock is fairly valued here, but he still boosted his price goal on expectations of a solid third quarter report. 

This should be the second quarter of dramatic net margin expansion, as Baidu sheds unprofitable businesses to focus on its stronghold of search while also investing in artificial intelligence that it sees boosting its core products. Chinese growth stocks have been surging back into investor fancy in recent months, and Baidu wants to make sure that it looks its best for the class photo. Thursday's announcement will be the first financial report in more than a year in which investors aren't dreading depressed comparisons. Smile pretty for the camera, Baidu. 

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