What happened

Shares of Baidu (NASDAQ:BIDU) sank 20.3% in 2019, according to data from S&P Global Market Intelligence . Despite a year of strong gains for the broader Chinese market, the search leader's stock slumped because of weak performance for its advertising business. 

GXC Chart

GXC data by YCharts

The stock's biggest drop of the year occurred in May, after the company reported miserable first-quarter results and an uninspiring outlook. The potential impact of the trade war between China and the U.S. was already making shareholders nervous before the release, and the results confirmed that Baidu's advertising business was seeing deteriorating performance and prompted investors to lower their expectations for the stock. 

A Chinese flag on top of a stock ticker display.

Image source: Getty Images.

So what

Baidu's advertising business faced multiple headwinds last year. With trade tensions pointing to the possibility that economic growth in China could remain sluggish, businesses were less interested in spending money on marketing. Baidu also took measures to remove ad partners from its platform and increase its overall standards to reduce the possibility of intervention from the Chinese government.

The stock did see some recovery in November after the company reported third-quarter results that showed better than expected earnings results and solid sales and membership growth for its streaming video spin off, iQiyi. Shares continued to trend higher through the end of the year but still dramatically underperformed the overall Chinese market.

Now what

Baidu stock has posted significant recovery early in 2019's trading. Shares are up roughly 14.1% in January's trading so far.

BIDU Chart

BIDU data by YCharts

Baidu is facing increasing competition, but it retains a leadership position in the Chinese search-and-advertising market. With signs that progress is being made on resolving the trade disputes between China and the U.S., it's possible that the company could be operating against a more favorable backdrop this year, but the business's strong position in fields like artificial intelligence and autonomous-driving technology give it avenues to long-term success even if more volatility hits in the near term.

Baidu stock is valued at roughly 20 times the average analyst target for this year's earnings.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.