What happened
Shares of Baidu (BIDU 1.24%), Weibo (WB 3.73%), and Sogou (SOGO) dove 16.5%, 10%, and 6.7%, respectively on Friday, after China's internet search leader -- Baidu -- reported its first quarterly loss since its initial public offering.
So what
Baidu's first-quarter revenue rose 15% year over year to 24.1 billion RMB ($3.6 billion), and 21% when excluding the impact of divested businesses. However, Baidu's online marketing revenues grew just 3% -- a marked deceleration from previous quarters.
Slowing revenue growth combined with heavy spending -- Baidu's operating expenses surged 53% -- led to the company's posting its first net loss since its 2005 IPO. Even adjusted earnings -- which exclude divestment and acquisition-related charges -- fell 80% to 967 million RMB ($144 million), or $0.41 per American depository share (ADS).
Hailong Xiang, senior vice president of Baidu's search business, abruptly resigned.
China's internet stocks fell hard on Friday. Image source: Getty Images.
Now what
Baidu said that its core search advertising business is likely to continue to face difficulties in the quarters ahead. "We anticipate online marketing in the near term to face a challenging environment," Baidu CFO Herman Yu said in a press release.
In turn, Baidu expects its revenue to fall as much as 3% on a reported basis, while rising just 1%-6% on an adjusted basis, in the second quarter.
This came as a shock to many investors, who have come to expect Baidu to deliver quarter after quarter of double-digit revenue growth. Many headed for the exits, and Baidu's stock price plunged in response.
Baidu's tepid outlook also led to a sell-off in other Chinese internet companies. Investors seem to fear that fellow Chinese search engine Sogou will face many of the same challenges that Baidu is currently dealing with. And shares of social media platform Weibo -- which relies heavily on online ads to generate revenue -- also fell hard on the news.
Investors will get to see if Baidu's slowing revenue growth is indicative of an industrywide slowdown, or more of a company-specific issue, when Weibo reports earnings on May 23.
