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Baidu Growing Again Isn't Enough

By Rick Munarriz - Oct 27, 2017 at 8:13AM

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China's online search leader lands at the high end of its top-line guidance for the third quarter, but its guidance leaves the market unimpressed.

Shares of Baidu (BIDU 1.85%) were initially weaker after the company posted its third-quarter results shortly after Thursday's market close. The leading Chinese search engine landed near the high end of its earlier top-line guidance, and earnings grew even faster than Baidu's top-line surge. However, an uninspiring forecast for the current quarter tripped up the stock that had hit an all-time high just last week.

Revenue is clocking in at $3.53 billion, 29% ahead of where the dot-com darling was a year earlier. Baidu was targeting 27% to 30% top-line growth. Net income soared 156% to $3.65 a share, or up 163% to $3.89 a share on an adjusted basis. The bottom-line performance was padded by a chunky investment gain realized on the disposal of its Baidu Deliveries restaurant delivery platform. However, operating income still managed to grow at a hearty 69% clip. Baidu doesn't offer up bottom-line guidance. 

Baidu's U.S. headquarters.

Image source: Baidu.

Searching for growth

Baidu's revenue growth is its strongest showing since the fourth quarter of 2015, but that isn't a surprise. Regulators forced Baidu and its smaller rivals to pare back the way that the once-lucrative medical-related sponsored listings were displayed in May of last year, something that depressed top-line gains over the five previous quarters. We're finally at the point where year-over-year growth is on an apples-to-apples basis.

Search continues to be the driver at Baidu. Online marketing revenue is accounting for 86% of its top-line results. Online marketing revenue rose 22%, as a 7% decline in the number of advertisers was more than offset by a 31% increase in the average spent per marketing customer. 

Expenses outside of content costs -- which surged as a result of increased outlays by its popular iQIYI video streaming site -- were kept in check, resulting in the explosive bottom-line results. 

Baidu's guidance may seem problematic at first glance. The $3.34 billion to $3.52 billion that it's targeting for the fourth quarter is just 22% to 29% growth. However, when you factor in the Baidu Deliveries business that it unloaded during the third quarter and the mobile games segment that it cut loose earlier this year, we'd be looking at 28% to 34% in organic growth. 

Baidu stock was trading 59% higher in 2017 as of Thursday's close, so it's fair to say that expectations were high heading into the report. Baidu's balance sheet is flush with what is now a record $16.25 billion in cash and short-term investments. It's been getting rid of nonprofitable endeavors that aren't part of its core search and artificial intelligence, and whether that money goes to snap up new pieces or just keeps growing the way the stockpile has over the years, Baidu is loaded both financially and with options.

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

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