Baidu's (NASDAQ:BIDU) stock recently dipped after the Chinese tech giant posted its fourth-quarter earnings. Its revenue rose 5% year over year to 30.26 billion yuan ($4.64 billion), marking its second straight quarter of sales growth but narrowly missing estimates by $20 million. Its adjusted net income fell 25% to 6.87 billion yuan ($1.05 billion), or $3.08 per share, but beat expectations by $0.49 a share. Baidu expects its revenue to rise 15%-26% year over year in the first quarter.

Those headline numbers look stable, but is Baidu's stock still worth buying after more than doubling over the past 12 months?

A young woman uses her smartphone in the middle of a crowded crosswalk.

Image source: Getty Images.

Baidu still hasn't fixed its biggest problem

Baidu generated 68% of its revenue from its online marketing services in the fourth quarter, compared to 72% a year ago. This core business mainly sells ads on its search engine, portal sites, and other apps.

Its revenue dipped 0.3% year over year to 20.71 billion yuan ($3.17 billion) during the quarter, marking its seventh straight quarter of declining sales. On the bright side, its revenue rose 2.5% sequentially.

Unfortunately, the growth of Baidu's advertising business is dismal compared to that of many of its Chinese peers. In their latest quarters, Tencent's (OTC:TCEHY) online advertising revenue rose 16% year over year, as Bilibili's (NASDAQ:BILI) advertising revenue soared 126%.

Baidu attributes its sluggish ad growth to macro headwinds and intense competition. But its problems are secular rather than cyclical: Baidu still owns China's top search engine, but people are spending more time on other apps like Tencent's WeChat, ByteDance's Douyin and Toutiao, and Bilibili. As a result, Baidu is becoming an also-ran in China's crowded advertising space alongside aging tech giants like SINA.

How is Baidu trying to expand?

Baidu is trying to counter this secular shift by expanding its ecosystem of Smart Mini Programs (SMPs), which compete against WeChat's Mini Programs, within its mobile app. It's also expanding its DuerOS voice search system with smart speakers, cars, and other connected devices.

Baidu ended the quarter with 544 million monthly active users (MAUs) on its mobile app, but it's still dwarfed by WeChat's 1.21 billion MAUs. On the bright side, 414 million of those MAUs regularly access Baidu's SMPs, and its total number of SMPs more than doubled year over year.

A woman conducts a voice search on her smartphone.

Image source: Getty Images.

DuerOS processed 6.2 billion monthly voice queries. Its Xiaodu smart speakers and screens processed 3.7 billion of those queries, up 66% from a year ago.

Baidu is also increasing its exposure to the live streaming market with its content creation platform BJH and its upcoming takeover of YY Live. Furthermore, its Apollo driverless platform continues to expand with new partnerships and EV joint ventures, and already powers autonomous vehicles in several cities across China.

The expansion of Baidu's ecosystem might reduce its dependence on its core search engine and portals, but these efforts aren't generating meaningful revenue yet. Therefore, investors should always take Baidu's ecosystem-expanding announcements with a grain of salt.

iQiyi is still a dead weight

Baidu spun off iQiyi (NASDAQ:IQ) in an IPO in early 2018, but it retained a majority stake in the online video platform.

iQiyi's growth initially offset Baidu's declining ad revenue, but its growth fizzled out over the past year. Its revenue, which accounted for 25% of Baidu's top line, dipped 0.5% year over year during the fourth quarter as its total number of subscribers fell 5% to 101.7 million. It narrowed its net loss from 2.49 billion yuan to 1.55 billion yuan ($237 million), but it remains a dead weight on Baidu's bottom line.

Baidu might still consider iQiyi a necessary part of its ecosystem or a buffer against Tencent Video and other premium video platforms, but it would arguably be wiser to divest the entire business.

How did Baidu generate positive growth?

As Baidu's two largest businesses floundered, its cloud business picked up the slack. The company noted the 52% growth of Baidu Core's non-marketing revenue was largely "driven by cloud and other services."

Baidu Cloud's growth boosted its "others" revenue (which includes iQiyi) by 18% year over year to 9.56 billion yuan ($1.46 billion). That growth looks promising, but Baidu only controls 7.1% of China's cloud platform market, according to Canalys, putting it in a distant fourth place behind Alibaba (NYSE:BABA) (40.9%), Huawei (16.2%), and Tencent (15.8%).

Moreover, Alibaba Cloud still isn't profitable by GAAP measures -- so Baidu is also likely operating its cloud platform at a loss to grow its market share. In short, it's another dead weight on its margins.

Should you buy Baidu right now?

Baidu's business is stabilizing, but it's still spinning too many plates. Its forecast for the first quarter is promising, but investors should see if its core advertising business grows and reduces its top-line dependence on unprofitable businesses like iQiyi and Baidu Cloud.

Baidu still looks reasonably valued at 25 times forward earnings, but investors should only nibble on the stock at these levels. It's priced for a strong comeback, but there are still too many moving parts in play to guarantee that actually happens.

 
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.