Chinese stocks have come under intense selling pressure in recent months, and Baidu (BIDU +4.52%) investors haven't been spared the carnage. Shares of China's leading search engine have plummeted 36% since peaking in mid-May, hitting another 52-week low on Friday.
By trading at levels not seen since two summers ago, Baidu is smoking out at least one opportunistic Wall Street pro. The stock was upgraded from negative to mixed by OTR Global on Thursday.
It wasn't enough to save the shares from hitting fresh lows the next day, but the next big test comes on Tuesday afternoon when Baidu reports its third-quarter results. Let's go over the things that need to go right for Baidu in that critical financial report.
Image source: Baidu.
1. Growth needs to overcome the crumbling yuan
Baidu's guidance last time out called for $4.02 billion to $4.23 billion in revenue for the third quarter, 23% to 30% ahead of where it landed a year earlier. The top-line uptick outlook grows to between 26% and 33% if you back out the cash-draining businesses that Baidu has sold over the past year.
The problem with relying on the dollar sums as targets is that currency fluctuations make it a moving target, and the yuan continues to shrink against the greenback. A buck was good for 6.8 yuan three months ago when Baidu made the second-quarter calculations, and now that same dollar can fetch 6.94 yuan. In short, Baidu can clock in with revenue below $4 billion and still fall well within its earlier range.
Analysts are smart enough to know this and will hold Baidu to its growth percentages on a yuan-based basis. Don't be surprised if some financial journalists mistakenly portray this as a miss if Baidu falls below the mark -- or the $3.99 billion consensus average. Baidu can make life easier on itself and its investors with a quarter that beats its earlier outlook, regardless of currency translations.
2. Baidu needs to prove its immunity to the trade tensions
It's not just currency translations gnawing away at Baidu's performance. Investors have been steering clear of Chinese growth stocks on concerns that percolating trade tensions and escalating tariffs will eat into their growth.
Baidu's paid search business relies on brisk marketing activity, and that naturally may be hurt if China's economy continues to slow. Investors will be looking to see if the number of advertisers on Baidu's platform still is growing and if the average revenue per client is also on the rise. Winning on both fronts will help ease the near-term concerns that have been weighing on the stock.
3. Let's keep the beats coming
Baidu has been hitting Wall Street's profit targets with ease over the past year, something that you don't normally see in a stock hitting new lows. Keeping that streak going could justify a bounce, and with analysts lowering their expectations for the third quarter in recent weeks, the stage is set for another potential upside surprise.
| Quarter | EPS Estimate | EPS Actual | Surprise |
|---|---|---|---|
| Q3 2017 | $1.96 | $3.72 | 92% |
| Q4 2017 | $1.93 | $2.16 | 12% |
| Q1 2018 | $1.53 | $1.89 | 24% |
| Q2 2018 | $2.41 | $3.06 | 27% |
Data Source: Yahoo! Finance. EPS = earnings per share.
Baidu's profit growth has been surprising Wall Street. The company's push to focus on its bread-and-butter online advertising business has treated investors to a bottom line that's growing faster than its top line. Baidu stock is out of favor at the moment, but don't be surprised if more analysts follow OTR Global in ringing the dinner bell if it comes through with another beat with its stock at a 15-month low.
