Baidu Posts Its First Loss Since Its IPO -- and Things Could Get Worse

Baidu's (BIDU +1.50%) stock is tumbling to a multiyear low after the Chinese tech giant posted its first-quarter earnings late on Thursday.

On the plus side, revenue rose 15% year-over-year to 24.1 billion RMB ($3.6 billion), matching expectations. Excluding the impact of its announced divestments, its revenue grew 21%.

However, Baidu saw red ink for the first time since its 2005 IPO, with a net loss of 327 million renminbi ($49 million), versus a profit of 6.7 billion RMB a year earlier. Its adjusted earnings -- which exclude divestments, acquisitions, and other charges -- plunged 80% to 967 million RMB ($144 million), or $0.41 per American Depository Share (ADS), missing estimates by $0.16.

For the second quarter, Baidu expects its revenue to stay roughly flat year over year on a reported basis, and rise just 1%-6% after excluding its upcoming divestments. That growth is shockingly weak compared to its double-digit sales growth over the past two years. Baidu's stock deserved to slide after that report, and things could get uglier before they get better.

Image source: Getty Images.

Examining the key numbers

Baidu's online marketing revenues rose 3% annually and accounted for 73% of its top line. That represented a massive slowdown from its growth in previous quarters.

YOY = year over year. Data source: Baidu quarterly reports.

Baidu stated that strong demand for ads in the education, retail, and business services markets failed to offset "less vibrant" demand from the healthcare, online gaming, and financial sectors. Baidu also stopped disclosing its growth in active online customers, and Hailong Xiang, the senior VP of its search unit, abruptly resigned.

Meanwhile, TAC (traffic acquisition costs) rose 41% annually and accounted for 13% of its total revenue and 18% of its marketing revenue. Those percentages were in line with previous quarters, and indicates that Baidu isn't spending too much money to lock in advertisers.

By comparison, Alphabet's Google spent 22% of its ad revenue on TAC last quarter, while Baidu's smaller rival, Sogou, spent a whopping 57% of its revenue on TAC last quarter.

However, Baidu's total operating expenses still surged 53% annually, and its non-GAAP operating margin plunged from 26% to 2%. That expense spike was caused by its ongoing investments in its virtual assistant DuerOS, its short video app Haokan, its autonomous driving platform Apollo, Mini Programs for the Baidu App, cloud services, and other ecosystem expansion efforts.

Are those investments paying off?

Baidu believes that those investments widen its moat against companies like Alibaba (BABA +3.61%), Tencent (TCEHY +2.80%), and ByteDance.

Alibaba competes against Baidu in the virtual assistant and smart speaker market, and it also sells ads across its marketplaces and digital media platforms. During the first quarter, Baidu's installed base for DuerOS grew 279% annually to 275 million devices as monthly voice queries surged 817% to 2.37 billion. By comparison, Alibaba recently stated that 10 million of its Tmall Genie speakers had been activated since Aug. 2017.

Baidu's Xiaodu speaker. Image source: Baidu.

Tencent corrals users into WeChat, the most popular messaging app in China, with 1.1 billion monthly active users and Mini Programs for a wide variety of services. Daily active users on Baidu's app, which competes against that massive platform, rose 28% annually to 174 million.

ByteDance is luring Gen Z users away with Tik Tok, a popular short video app that topped 500 million monthly active users last year. Baidu's Haokan, its answer to Tik Tok, grew its daily active users just 16% sequentially to 22 million during the quarter.

But that's not all -- Tencent and Alibaba also compete against Baidu in the advertising, streaming video, cloud, and autonomous driving markets. In other words, if Baidu stops expanding its ecosystem, it could be left behind the ever-shifting tech curve.

Both Alibaba and Tencent reported robust earnings earlier this week. Alibaba’s e-commerce revenue grew 51% from a year ago. Tencent, despite a slow-recovering gaming business, still turned in a 17% rise in net profit.

Struggling to adapt to a changing market

Baidu's first-quarter report was disappointing, and its dismal guidance tells investors to expect anemic revenue growth and higher spending over the next few quarters. The abrupt resignation of its search chief also indicates that the company is struggling to adapt to a changing market.

Baidu authorized a new $1 billion buyback plan to smooth things over, but that cash would arguably be better spent on shoring up its defenses against Tencent, Alibaba, and ByteDance. Investors who currently hold Baidu shouldn't panic and sell their stock at these levels, but those who are looking for a better Chinese tech play should consider buying Tencent or Alibaba instead.