Please ensure Javascript is enabled for purposes of website accessibility

Is Baidu Stock Ready to Bounce Back This Time?

By Rick Munarriz – Aug 17, 2020 at 11:56AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Last week was rough for China's leading search engine provider, but one analyst isn't afraid to jack up his price target on the bellwether's stock.

Last week was rough for Baidu (BIDU 0.39%). Shares of China's leading search engine provider tumbled nearly 7% last week, bucking the otherwise rising market. A mixed quarterly earnings report and problematic news out of its majority-owned iQiyi (IQ 2.60%) held Baidu back, but hope springs eternal in the new week.

KeyBanc analyst Hans Chung is kicking off the new week by lifting his price target on the stock from $145 to $155, despite the shares moving lower last week. He accepts that the SEC investigating iQiyi's books is not a good look. The impact of COVID-19 also continues to linger at Baidu. However, he sees the recent weakness in the shares as a buying opportunity given its compelling valuation, stronger revenue quality, and improving app engagement and the long-term potential of its artificial intelligence business. Chung's new price target implies 33% in upside from where it was at the end of last week. He is naturally sticking to his bullish overweight rating on the stock. 

Baidu's research advisory board posing in front of Baidu offices.

Image source: Baidu.

Baidu is due, so buy

Baidu's second quarter wasn't very exciting. Revenue declined 1% to hit $3.69 billion, just shy of the $3.7 billion that analysts had been modeling. This is an improvement over the 7% year-over-year slide it had posted three months earlier in its first quarter, but it's hard to get excited about a flat showing.

Baidu points out how its business is starting to rebound, but it's going to require some patience to see it through. Things don't appear to be getting materially better during the current quarter. Guidance calls for third-quarter revenue to clock in between a decline of 6% and a gain of 2%. If we go by the midpoint -- a 2% dip -- it would be the third straight quarter of negative revenue growth. 

The news is a lot better on the other end of the income statement. Baidu's adjusted profit of $2.08 a share blew past Wall Street expectations of $1.38 a share. That makes the fourth quarter in a row that Baidu has landed well above analyst profit targets, but with the top line falling short -- and guidance uninspiring -- it wasn't enough to lift Baidu higher.

The situation at iQiyi bears watching. The SEC is looking into a third-party allegation that the video streaming site has inflated its subscriber numbers, expenses, and content costs. These are some pretty serious allegations if true, but we'll have to wait for what the SEC has to say after digging deeper into the situation. Baidu spun off iQiyi two years ago, but it does have a controlling stake in the operations. Even if iQiyi is no longer a key driver for Baidu's future, any hit there will be a credibility smackdown on Baidu itself. 

For now the iQiyi uncertainty and Baidu's own outlook for flattish top-line growth could keep the gains in check. There's also a lot of heat being placed on investing in Chinese stocks in light of U.S. trade tensions. However, with Baidu trading for just 14 times next year's projected earnings -- a target that the Chinese online giant has been routinely trouncing -- now is a good time to begin establishing a position if you're patient and tolerant of the inherent risks of buying into the world's most populous nation.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.

Stocks Mentioned

Baidu Stock Quote
Baidu
BIDU
$120.80 (0.39%) $0.47
iQIYI Stock Quote
iQIYI
IQ
$3.75 (2.60%) $0.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.