There was a lot at stake when Baidu (BIDU 6.24%) was set to release its third-quarter earnings report on Nov. 6. The company's stock had been struggling since last year due to a number of factors, including trade tensions between the U.S. and China, a general slowdown of the Chinese economy, and increased competition that is eating away at its core business. Year to date, Baidu's stock is down by 28%.
Baidu's results showed some good signs, however, perhaps most notably with its revenue of $3.93 billion and its non-GAAP earnings per American depositary share (ADS) of $1.76 both coming out well ahead of analyst estimates. Baidu's shares rose sharply after its earnings release, but the company will continue to face headwinds, and it is worth wondering whether investors expressed too much optimism on the heels of its financial results and whether Baidu can go back to being the growth stock it once was.
Baidu is still looking to diversify its business
Baidu has historically generated the bulk of its revenues from its ad business, and it continues to do so. However, with other platforms such as WeChat -- a popular messaging app owned by Tencent (TCEHY 2.05%) -- the ad market has been tougher for the tech company. Note that WeChat reported more 1.15 billion monthly active users during Tencent's third quarter. With Baidu's core ad business facing obstacles -- its online marketing revenue decreased by about 9% during the third quarter -- the company has been looking to other sources of revenue to pick up the slack. And while Baidu is pulling in revenue from several other sources, two in particular look promising.
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The first is Baidu's smart-speaker business, which ranks as the top dog in China, the world's largest smart-speaker market. Further, the company recently took the second spot in this segment worldwide, right behind Amazon. According to research firm Canalys, Baidu's shipments of smart speakers reached 4.5 billion during the second quarter, good enough for a respectable 17.3% market share worldwide. This could present a strong opportunity for the company, as this segment continues to expand both in China and worldwide (although Baidu's smart speakers aren't sold in the U.S. market, the second largest in the world). During the company's earnings conference call, Baidu's CEO Robin Li said, "We believe it is important for Xiaodu smart speakers to maintain a large market share because scale will allow us to build brand, increase pricing power and reduce unit cost."
The second revenue generator is, of course, Baidu's subsidiary iQiyi (IQ 0.22%). The video platform continues to perform well: During the third quarter, Baidu reported that iQiyi's subscribers reached 105 million, a 31% increase from the corresponding period of the previous fiscal year. iQiyi's membership revenue grew by 30% year over year. However, this growth was offset by a 14% decline in its advertising revenue compared to the year-ago period, adding up to a net revenue increase of 7%. The platform's membership growth further strengthens Baidu's ecosystem. However, it is important to remember that iQiyi is still operating at a loss, making it a dead weight on Baidu's bottom line.
Is Baidu stock a buy?
Baidu's diversification initiatives look somewhat promising, and it isn't too surprising that the market reacted positively to its latest earnings report, which exceeded expectations. But perhaps the best argument for investing in the company today is its valuation metrics. Baidu is currently trading at just 9 times past and 16 times future earnings. For those who see the value in the tech giant, this could be an opportunity to purchase its shares.
