It remains to be seen when Baidu (BIDU +5.91%) will get back on the growth track, and with the shares trading lower for the third year in a row it's easy to wax nostalgic about the glory days. However, with shares of China's leading search engine operator moving sharply higher after posting a better-than-expected earnings report on Monday night one has to wonder if the former dot-com darling is finally ready to start winning again.
Baidu's first quarter may not seem solid at first glance. Total revenue declined 7% in the first quarter, with Baidu Core -- its flagship search, feed, and AI businesses -- checking in with a 13% slide. The good news is that investors were bracing for worse. Given the early and thorough impact of COVID-19 in China, Baidu's own guidance for the period was calling for a 5% to 13% year-over-year slide in total revenue with a 10% to 18% plunge in Baidu Core. Baidu landed at the kinder end of the midpoint of both of those ranges, and that was with the initial outlook in late February. The global situation with the pandemic naturally got even worse in the third and final month of the quarter. Baidu's $3.18 billion in revenue for the quarter was comfortably ahead of the $3.1 billion analysts were targeting.
Image source: Baidu.
Turning momentum around
Baidu has been one of the market's bigger winners since going public at a split-adjusted price of $2.70 in the summer of 2005, and it's nearly a 40-bagger over those 15 years. This is an entirely different story if we draw the starting line at the end of 2017, as the stock has gone on to shed more than half of its value through Monday's close. Baidu's fall from grace has been partly self-inflicted, but the online advertising market in China itself has been softening since the country's economy started to slow amid U.S. trade tensions last year.
There are a few encouraging signs in Monday's report. Adjusted earnings and operating profit more than tripled, also naturally vastly exceeding market expectations. A lot of things are going right at Baidu, particularly in mobile. Baidu App's daily active users hit 222 in March, up 28% over the past year with in-app search queries soaring 45%. The growth is accelerating from the prior quarter's pace, and that's going to come in handy when the headwind of China's weak online advertising market turns into a headwind.
Baidu's making the most of its stock trading 55% below where it was at end of 2017. Its board has authorized another $1 billion in repurchases, and it's good for the money, with more than $20.7 billion in cash and marketable securities on its balance sheet.
We still have a long way to go to return to where we were before back-to-back years of sharp declines and a 2020 that still finds Baidu in a hole. Revenue has still declined in three of the past four quarters. Baidu's guidance is inspiring, relatively speaking. The $3.5 billion to $3.9 billion on the top line that it's forecasting for the current quarter is a sequential pop even at the low end. On a year-over-year basis we're looking at a decline of 5% on the low end and an increase of 4% on the high end. The midpoint of that range is roughly flat growth, but that's not a bad thing as China starts to breathe new life into its economy.
It will always be risky to invest in Chinese stocks, but it's hard to dismiss Baidu after a bad couple of years. It still has a dominant position in search, and a lot of the negative trade tensions, hobbled economy, and COVID-19 setbacks appear to be clearing in the world's most populous nation. Baidu isn't back to where it was in its prime, but it is taking some steps in the right direction.
