Baidu (BIDU +0.88%), which owns China's top online search engine, was once considered one of that country's top tech stocks. But over the past three years, its stock has lost roughly 40% of its value as the company has faced tougher competition in digital ads.
Baidu plans to release its second-quarter earnings on Aug. 13, and the bar has been set pretty low. Baidu's previous forecast for itself called for revenue ranging from a 5% drop to a 4% gain, and analysts expect its revenue and earnings to decline by 2% and 4%, respectively.
Will Baidu clear those low bars and convince investors that its business its stabilizing? Or will it turn in a disappointing quarter that highlights the strengths of its rivals in China's crowded advertising market?
Image source: Getty Images.
Reviewing the key numbers
Baidu generated 63% of its revenues from its online marketing business last quarter. The rest came from its "other" businesses, which mainly include its video streaming platform, iQiyi (IQ +1.07%). Baidu spun off iQiyi an IPO in 2018 but maintains a majority stake in the company.
Baidu's online marketing revenue has declined year over year for four straight quarters. iQiyi's revenue growth partly offset those declines, but the video platform's growth has also decelerated significantly over the past year.
Here's a look at how Baidu has been doing year over year.
| Metric |
Q1 2019 |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
|---|---|---|---|---|---|
|
Online marketing revenue |
3% |
(9%) |
(9%) |
(2%) |
(19%) |
|
Other revenue |
73% |
44% |
34% |
35% |
28% |
|
Total revenue |
15% |
1% |
0% |
6% |
(7%) |
|
Adjusted net income |
(80%) |
(53%) |
(35%) |
95% |
219% |
Year-over-year changes. Data source: Baidu quarterly reports.
Why is Baidu stuck in a rut?
Baidu's online marketing revenue has declined for two main reasons. First, the Chinese economy is growing at its slowest rate in nearly three decades. That deceleration, which was exacerbated by the trade war and the COVID-19 crisis, is prompting companies to buy fewer ads.
Second, China's internet users have started using a wider range of apps and services beyond Baidu's core search engine and portals. These competitors include Tencent's (TCEHY +1.21%) WeChat, the country's top messaging platform, with over 1.2 billion monthly active users (MAUs); ByteDance's family of apps including Douyin and Toutiao, which serves over 1.5 billion MAUs; and the Gen Z-oriented media platform Bilibili (BILI 0.44%), which served 172 million MAUs last quarter.
In their latest quarters, Tencent's ad revenue rose 32% annually and Bilibili's ad revenue surged 90%. Both companies cited strong ad demand from China's gaming, e-commerce, and online education sectors throughout the COVID-19 crisis -- but Baidu didn't reap the same benefits.
Tencent arguably represents the biggest threat to Baidu. WeChat's mini programs let users make payments, order food, hail rides, search the news, and more without ever leaving the app. It also recently launched a bid for Baidu's biggest search rival, Sogou (SOGO +0.00%), to strengthen its online search capabilities.
Meanwhile, iQiyi's revenue growth weighs down Baidu's margins, since the video platform is still unprofitable. Its growth is also decelerating amid intense competition from Tencent Video and Alibaba's (BABA +1.67%) Youku Tudou.
Baidu's turnaround options remain limited
Baidu often highlights the growth of its cloud, artificial intelligence, and driverless businesses to draw attention away from its struggling ad business and its dependence on an unprofitable video platform. Unfortunately, those next-gen businesses don't generate meaningful revenue yet.
Image source: Getty Images.
Baidu is trying to counter Tencent by locking users into its mobile app with mini programs. Last quarter, Baidu claimed its mobile app's daily active users (DAUs) rose 28% annually to 222 million and that MAUs for its mini programs nearly doubled to 354 million. That's a good start, but it remains far behind WeChat in terms of active users and mini programs.
Baidu's other big play is DuerOS, the virtual assistant that powers its smart speakers and other devices. Baidu is now one of the top smart speaker makers in China, but it sold its speakers at steep discounts to claim that position.
Baidu's top rival in the smart speaker market is Alibaba, but Tencent could gain ground if it acquires Sogou's voice search engine, which processed 1.4 billion daily voice queries last quarter. DuerOS processed 6.5 billion monthly voice queries last quarter, while Baidu's Mobile Keyboard app, which competes directly against Sogou's voice-enabled Mobile Keyboard, processed over a billion daily voice queries.
Baidu isn't cheap relative to its growth
Analysts expect Baidu's revenue to rise just 1% this year as its earnings decline 13%. Those are anemic growth rates for a stock that trades at about 20 times forward earnings. Moreover, Baidu, like many other Chinese tech stocks, could be forced to delist its stocks from U.S. exchanges if a new Senate bill targeting Chinese companies is passed into law.
I own shares of Baidu, but I can't recommend buying this stock ahead of its second-quarter earnings. To attract the bulls again, it must present viable ways to counter its competitors in the advertising market, reduce its dependence on iQiyi, and allay concerns about a potential retreat from U.S. markets. Until it checks all three boxes, Baidu will continue to underperform stronger Chinese stocks like Tencent and Alibaba.
