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Baidu Falls Short on Several Fronts

By Rick Munarriz – May 17, 2019 at 8:30AM

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China's leading search engine surprises investors -- in a bad way -- with its first quarterly loss in years. Slowing growth, weak guidance, and one exec moving on aren't helping.

Growth is slowing at Baidu (BIDU 1.69%), and it's also taking a toll on its bottom line. The dot-com pioneer behind China's leading search engine posted mixed financial results after Thursday's market close, and the initial market reaction was to sell off the stock. Having a key executive step away from the company obviously didn't help. 

Revenue clocked in at $3.59 billion for Baidu's first quarter, 15% ahead of where it was a year earlier. Back out the nonessential businesses that Baidu has unloaded over the past year and revenue would've climbed at a healthier 21% clip. The top-line performance isn't surprising. It's actually smack dab in the middle of the guidance it offered three months ago. The bottom line was another story.

Exterior of Baidu's U.S. research lab.

Image source: Baidu.

Falling into a hole

There are plenty of moving parts at Baidu despite the divestitures, and they're not all heading in the same direction. Online marketing revenue -- accounting for the lion's share of Baidu's top line at 73% of total results -- rose just 3% as weakness in healthcare, online game services, and financial services kept gains in education, retail, and business services in check. The balance of Baidu's revenue, on the other hand, soared 73%. 

Baidu Core -- its flagship online search business and other key businesses outside of its iQiyi (IQ -2.58%) spinoff -- rose 8% to $2.6 billion. Streaming video giant iQiyi helped push overall results higher with its 43% top-line surge.

Once again, we find things slipping and sliding away all the way down the income statement. High content costs at iQiyi and skyrocketing traffic acquisition costs including a successful but costly CCTV New Year's Gala marketing campaign obliterated margins. Baidu posted an operating loss and a deficit on the bottom line, and even on an adjusted basis earnings plummeted 80% to $144 million or $0.41 a share.

The rough bottom-line showing isn't the only thing weighing on investors. Baidu announced that Hailong Xiang -- its senior vice president of search -- tendered his resignation after a 14-year stint at the dot-com pioneer. Guidance was another pressure point.

Baidu sees revenue clocking in between a decline of 3% and a gain of 2% for the second quarter. Backing out the businesses it has sold, continuing operations are expected to inch just 1% to 6% higher. Decelerating growth, squeezed margins, and one executive moving on are all bad looks on Baidu's end. Trade tensions with the U.S. and China's slowing economy are bad looks on a broader scale. 

Baidu headed into earnings season with its highest short interest in more than a year. A blowout quarter or even a decent one could've triggered a short squeeze, but instead it was margins -- and the bulls -- getting squeezed this time.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

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