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3 Things That Can Go Wrong for Baidu on Tuesday

By Rick Munarriz - Feb 12, 2018 at 1:37PM

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China's online search leader has a lot to prove when it reports fourth-quarter results this week. The stock took an 8% hit the day after the company released its third-quarter results last time out.

China's leading search engine is on the clock. Baidu (BIDU 3.56%) reports financial results after Tuesday's market close, and the dot-com darling will host its quarterly earnings call later that night. There's a lot riding on the report. 

Baidu has been one of the market's biggest tech winners over the past decade, but the stock has been cooling off lately. Baidu stock is kicking off this week trading 22% below its peak value set in mid-October. The shares have moved lower in two of the previous three years, and Baidu is trading slightly negative so far in 2018. A strong showing on Tuesday can get the shares moving in the right direction again, but there are a few things that can go wrong. Let's go over what can trip up Baidu stock this week.

Baidu.com landing page on the internet.

Image Source: Baidu.

1. Revenue can fail to beat expectations again

Baidu has historically offered up conservative top-line guidance that it can surpass with ease three months later. We didn't see that happen last time out, as the 29% increase in revenue was within the 27% to 30% range it was targeting over the summer. The stock responded with an 8% slide the next day, even though the 29% growth was Baidu's biggest spike since late 2015.

Guidance calls for $3.34 billion to $3.52 billion in revenue for the fourth quarter, 22% to 29% ahead of the prior year's showing. Analysts seem cautious here, nearly splitting the difference by forecasting a 26% rise in revenue. Organic revenue is actually going to be stronger than that, as Baidu's guidance calls for 28% to 34% in growth if it weren't for the Baidu Deliveries and mobile gaming businesses that it unloaded last year. However, another quarter of landing within its earlier range will take some shine off of Baidu as a Wall Street target eater. 

2. Chinese peers haven't wowed the market this season

We can't lump all Chinese internet stocks into the same basket, but it's somewhat problematic to see companies that have already reported in recent days disappoint the market. Sogou (SOGO) took a hit when it posted its fourth-quarter results two weeks ago. Sogou bills itself as China's second-largest search engine, and it missed Wall Street estimates on both ends of its income statement. Sogou's guidance also fell well short of the revenue that analysts were modeling for the first quarter of this year.

It's not just Sogou failing to live up to the hype. A couple of the dot-com darlings of China that have already reported have fallen short this season

3. Advertiser count can continue to shrink

Baidu still lives and dies by its search engine. Online marketing revenue accounted for 86% of its revenue in the third quarter. Revenue there improved by 22%, but it was the combination of a 7% decline in advertisers more than offset by a 31% increase in the average amount spent per customer. 

Ripping pages out of its Rolodex has been by design as it removes controversial medical advertisers from its customer list. However, the trend eventually has to stabilize, and it better do so before average revenue per advertiser decelerates sharply. 

Keeping content costs at its iQIYI video-streaming platform in check, widening its margins again, and keeping its streak of landing well ahead of analyst profit targets will be the keys to Baidu moving higher after Tuesday's report, but let's not dismiss the three things that can send the stock lower.

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Stocks Mentioned

Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$151.34 (3.56%) $5.21
Sogou Inc. Stock Quote
Sogou Inc.
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