Friday was a rough day for investors in Chinese growth stocks. The market's biggest loser was Jiayin Group (Nasdaq: JFIN), plummeting 38% on its sixth day of trading. To be fair, the online individual-finance marketplace operator had more than doubled through its first five days on the market. Jiayin IPO investors are still sitting pretty.
However, there were no silver linings for Baidu (BIDU +3.05%) and to a lesser extent its iQiyi (IQ 6.60%) spinoff. The two former market darlings fell 16.5% and 6.6%, respectively, on Friday after posting disappointing financial results. Rising content costs at iQiyi weighed on Baidu's shocking bottom-line results, so why didn't iQiyi bear the brunt of the sell-off? Let's explore the reasons the spinoff held up better than the parent.
Image source: iQiyi.
1. iQiyi was already losing a lot of money
Baidu landed in the center of its top-line guidance in Thursday night's financial update. The first of the two major sticking points in the report was Baidu's surprising operating loss and net deficit, something that had never happened since its 2005 IPO, according to data from S&P Global Market Intelligence.
Even on adjusted basis, seeing Baidu's profit plunge 80% to hit $144 million, or $0.41 a share, is shocking. It's the first time in more than a year in which Baidu failed to top analyst earnings expectations.
iQiyi has a different story. The streaming video leader reported a substantial loss, but this is what iQiyi has been doing all along. It's not a joy to see its operating loss nearly double to $302 million for the first quarter, but the company isn't being judged heavily on its bottom-line results. Wall Street pros don't see iQiyi turning a profit until 2022 at the earliest.
2. Guidance matters
The other dagger in Baidu's report was its lackluster outlook. Baidu is eyeing revenue to check in between a dip of 3% and an uptick of 2% for the second quarter. Even if we back out the businesses that Baidu has unloaded over the past year we see top-line growth guidance of no more than 6%.
Growth is also expected to decelerate sharply at iQiyi. It's eyeing $1 billion to $1.1 billion in revenue for the current quarter, 12% to 18% ahead of the prior year's showing. That's well below the 43% top-line burst it managed in the first quarter, but it's a relief when pitted against the flattish outlook at Baidu itself. If you back out iQiyi's contribution to Baidu's growth for the second quarter, we're probably looking at a rare decline in online marketing revenue at Baidu, a head-shaking hit for its flagship business.
3. iQiyi didn't lose a key executive
Another thing that made things worse for Baidu is that it announced the resignation of Hailong Xiang. Baidu's senior vice president of search is leaving the company after 14 years.
Baidu has enough moving parts that it can overcome the loss of a senior VP, but it's still not an ideal announcement after a rough report. But Xiang's departure will have a minimal impact on iQiyi's business, particularly these days, when the growth driver for the video streaming platform is to get ad-viewing free members to upgrade to premium plans.
