Shares of Baidu (NASDAQ:BIDU) were hitting all-time highs last week, but after they tumbled 15% over the past three trading days, it's easy to wonder if they will be revisiting Wednesday's high-water mark anytime soon. China's leading search engine has seen its stock come under pressure after its COO announced late last week that he would be stepping down.
Qi Lu will be relinquishing his COO duties in July. It doesn't seem as if he's leaving for greener pastures. The official reason for his exit is that it is "due to personal and family reasons." He plans to spend more time with his family residing stateside. Lu will also stay on as vice chairman of Baidu's board of directors, so there's no reason to believe that he's stepping down because he's concerned about anything at the company. However, the fact that he was a celebrated hire just last year -- coming over from Microsoft as its global executive vice president of applications and services group -- makes this a disappointing if not puzzling retreat.
Lean and mean
Lost in the downtrend since last Wednesday's all-time high is that Baidu continues to focus on its core operations. Baidu announced on Monday that it had entered into definitive agreement to sell a majority stake in its global ad and tools business.
Baidu didn't provide terms of the transaction, but by keeping just a 34% stake in the business, Baidu will be able to deconsolidate it. Baidu has been doing this with several sometimes profit-draining businesses, including its video streaming and food delivery businesses, and the end result has been an explosion on the bottom line. Baidu's operating profit and adjusted earnings more than doubled in its latest quarter despite its revenue growing at a bit more modest 31% clip.
Investors have been applauding Baidu's move to get back to basics, even as it continues to throw money at artificial intelligence initiatives. The stock did open higher on Monday in response to the news, but by the end of the day the shares had slumped to close sharply lower for the third day in a row.
Losing its COO isn't a good look, but it's not going to slow Baidu. Its guidance still calls for revenue to rise 26% to 33% in 2018, or a slightly better 28% to 34% uptick if we zero out the contribution last year from the businesses it has now unloaded.
Baidu is doing well, and the sell-off appears to be overdone if it's solely based on Lu scaling back his involvement at Baidu. The market sent the stock up to a new high last week based on its recent financial execution and laser focus, and that's not going to change now.