In this segment from the MarketFoolery podcast, host Chris Hill and Motley Fool Chief Investment Officer Andy Cross weigh in on Baidu (NASDAQ:BIDU), which reported quarterly profits that beat expectations.
Unfortunately for shareholders, what interested the market more was the revelation that Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) unit Google has been working on censored search engines and news apps that would allow it to reenter the Chinese market, which the company exited in 2010 in large measure because it refused to acquiesce to Beijing's demands that it censor search results. The Fools consider what it means for both tech giants and weigh the investment thesis for Baidu.
A full transcript follows the video.
This video was recorded on Aug. 1, 2018.
Chris Hill: Second quarter profits for Baidu rose 45%. Baidu, also known as the Google of China. Profits were higher than expected, why is the stock down 7% today?
Andy Cross: I think there's probably some overall concerns. There was a story coming out that, perhaps, its U.S. compatriot, as you mentioned, Alphabet, is going to have an offering in China that's going to be slimmed down. That team is out there, talking about -- they're not in China, and they're excluded from China -- maybe having a solution there. I think some investors are a little bit concerned there.
Also, Baidu's growth rate for the next quarter ... I mean, it's still good. They're still in the 25-30% expected top line growth rate, but maybe not quite what investors were expecting. It's not like the stock is collapsing, but it's down a little bit.
Hill: I'll come back to the stock in a minute. This is interesting, this Reuters story that got posted this morning about Google. According to internal documents, Google is planning a censored version of its search engine in China. For those who don't remember, Google did try to make it in China, tried to make a push in, and essentially folded up their tent and said, "We're leaving. It's not working for us from a business standpoint." It will be interesting to see if this happens, if they can make it work, and what that does both for Alphabet and for Baidu.
Cross: One thing we've seen historically, since you and I have been doing this over the last two decades, is the first mover advantage, the leading dog into a market, to be able to have that market penetration rate with their client base. Baidu has that inside China. Not that Alphabet couldn't take some of that. They could. Certainly, it's a huge brand and an amazing company that also has been able to do pretty amazing things over the last couple of years, as they're thinking about new ways to invest in both their technology as well as their services. So, I certainly wouldn't put it past them.
But, Baidu does have that leading edge in China. As they continue to build out more and more app-driven experiences tied to their search, and as they continue to expand their mobile offerings ... Robin Li, the heart and soul of that organization, I certainly would not put anything by Baidu to be able to fend off something like that -- if it even happens. China is a total wild card, as we know, for U.S. companies. We'll have to see how that story plays out.
I'm still excited about what investors are going to be able to get from Baidu as they continue to invest more and more in these new initiatives -- whether it's AI or self-driving cars or new chip technology, which is a really exciting area for Baidu, although it won't directly generate a ton of revenue for any time soon. The AI side, tied to their advertising client base, is huge, and they have that edge there.
Hill: It's interesting, when you look at a chart of Baidu's stock. You're absolutely right, this is an $80 billion company. The stock is down today, it's not collapsing. The underlying health of this business is very strong. And yet, when you look at this stock, it's basically where it was a year ago. Although, in the last 12 months, it has visited all these different places, both high and low.
Cross: It's actually been very volatile. I know different investors here at The Motley Fool in different services have taken advantage of some of that volatility. For a company that, when you look over the next five to ten years, will certainly be a big player in a very large market -- I mean, there are almost 1.5 billion people in China, and more than 700-800 million of those are online. A massive consumer market, obviously. They're going to be a key player in that. But, you're right. The stock, really, when you think about some of the performers, whether it's the Alphabets, Apples, Netflixes, Amazons, all these amazing technology companies and what their stocks have done over the last two years, last year, for example. Baidu hasn't really been able to keep pace. That either tells us that investors are missing the long-term story, or they're just not quite excited about Baidu's prospects. I think I fall more on the side of, I'm pretty excited about Robin Li and what his team can do in China.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andy Cross owns shares of Netflix. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Baidu, and Netflix. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.