Shares of Baidu (BIDU +0.86%) were within spitting distance of new all-time highs at the start of last week, but they never got closer. China's leading search engine saw its stock fall 12.3% for the week.
It was generally a rough week for Chinese equities. Several of the country's growth stocks -- including Baidu's distant rival in search -- suffered double-digit percentage slides. There was no Baidu-specific news triggering the slide, but you don't have to look hard to find the catalyst. President Donald Trump signed an executive memorandum to impose tariffs on up to $60 billion of Chinese imports, and China responded by announcing plans for reciprocal tariffs on 128 different U.S.-sourced products. Search and online advertising would seem to be immune from the retaliatory tariffs being proposed, but investors generally get nervous when a trade war is afoot.
Image source: Baidu.
Things were going so well
The only news out of Baidu last week was actually positive. The dot-com darling announced that it received Beijing's first batch of licenses to test out its autonomous driving vehicles in designated areas of the populous Chinese capital.
There's also momentum building for the iQiyi IPO that's expected to price and hit the market later this week. Baidu's move to deconsolidate its fast-growing but deficit-saddled video-streaming platform should help Baidu's already hefty coffers while improving its reported profitability. It's a case where the parts of Baidu could be valued as more than the current consolidated sum, and probably a good reason why Baidu was within 5% of its all-time high before last week's trade war hiccup.
Baidu itself is rolling. It posted blowout financial results last month. Revenue rose a better-than-expected 29% for the fourth quarter, its biggest growth spurt since late 2015. Guidance for the current quarter calls for the top line to move 25% to 32% higher for the current quarter, or an even more impressive 29% to 36% if we back out the profit-slurping non-core businesses it sold off in 2017.
The emphasis at Baidu is now its search stronghold and its breakthroughs in artificial intelligence. Baidu is doing things right, but it's now at the mercy of international trade tensions. This week's iQiyi IPO can help turn things around, and it obviously wouldn't hurt if tariff talk cooled or at the very least the market's opinion on how the trade war will impact tech stocks eased up somewhat.
The stock kicks off this week priced at just 25 times this new year's projected earnings and just 20 times next year's analyst target. Baidu has historically commanded much higher multiples, and it has all the makings of a bargain at a time when its revenue growth is accelerating. Retaliatory tariffs may blur the near-term stability of Baidu, but the long-term prognosis for a recovery -- and an eventual new all-time high -- is pretty strong.
