Is Baidu Stock a Buy?

Baidu's (BIDU 0.98%) stock slumped on Aug. 12 after the Chinese tech giant posted its second-quarter earnings. The company beat analysts' estimates on the top and bottom lines, but its third-quarter guidance was softer than expected and indicated its core business was slowing down again.

Baidu's stock had already been cut in half over the past six months as China cracked down on its top tech companies, so it needed to hit a home run to stop the bleeding -- but it failed to knock the ball out of the park. Let's take a deeper look at Baidu's business and see if its stock is still worth buying.

Image source: Getty Images

Its growth is decelerating again

Baidu's second-quarter revenue rose 20% year over year to 31.4 billion yuan ($4.86 billion), which narrowly beat estimates by $50 million. This marked its fourth consecutive quarter of positive sales growth, but also represented a slowdown from its 25% growth in the previous quarter.

Data source: Baidu. YOY = Year over year.

Baidu expects that slowdown to continue with 8% to 19% year-over-year revenue growth in the third quarter. The midpoint of that forecast comes in well below analysts' expectations for 19% growth.

Baidu generated 65% of its revenues from its online marketing business in the first half of 2021, compared to 66% in the first half of 2020. This core business previously suffered seven straight quarters of year-over-year revenue declines before finally growing again in the first quarter of 2021.

Data source: Baidu.

Baidu's online marketing business struggled as advertisers pivoted away from its core search engine toward Tencent's (TCEHY 3.23%) monolithic WeChat platform, ByteDance's news app Jinri Toutiao and its short video app Douyin (more commonly known in the U.S. as TikTok), and Gen Z-oriented platforms like Bilibili. China's economic slowdown, along with the ongoing trade war and COVID-19 pandemic, exacerbated that pain.

That slowdown forced Baidu to rely more heavily on its "others" business, which generates most of its revenue from its streaming video subsidiary iQiyi (IQ 5.24%) and Baidu Cloud. But both of those businesses are still unprofitable and actually weigh down Baidu's adjusted EBITDA margins:

Data source: Baidu.

However, Baidu's adjusted net income in the second quarter still grew 5% year over year to 5.36 billion yuan ($830 million), or $2.39 per American depository share (ADS) -- which beat estimates by $0.33.

That earnings beat was driven by an easy year-over-year comparison for the online marketing segment, which struggled during the pandemic a year ago. The expansion of Baidu's Managed Page business, which maintains a company's entire online presence within Baidu's ecosystem, and the growth of its mobile app -- which now serves 580 million monthly active users -- amplified that recovery.

Ambitious long-term plans, but lots of near-term headwinds

Over the long term, Baidu expects the expansion of its AI and driverless ecosystems -- as reflected in its virtual assistant DuerOS, its open-source autonomous vehicle platform Apollo, and its electric vehicle partnerships -- to diversify its business beyond its online marketing services.

It also expects its content creation platform BJH, its Managed Pages, and its planned takeover of JOYY's (YY 1.15%) YY Live streaming video platform to reduce the online marketing segment's dependence on its core search engine. However, that transformation remains in the early stages and won't prevent a near-term slowdown.

Image source: Baidu.

During the conference call, Baidu CFO Herman Yu attributed the soft third-quarter guidance to the "evolving" COVID-19 situation in China, which is currently struggling with a new wave of delta variant infections.

But there are also other challenges on the horizon. The government recently approved Tencent's takeover of Sogou (SOGO), China's second-largest search engine, and its integration into WeChat could pull more users away from Baidu. Baidu's takeover of YY Live hasn't closed yet, and China's ongoing crackdown on its tech companies -- which it plans to continue through the end of 2025 -- could still derail the deal.

Baidu's AI Cloud still faces tough competition in China's cloud infrastructure market -- where it trails in fourth place behind Alibaba (BABA 2.92%), Huawei, and Tencent -- and it could still be years before it generates any meaningful revenues from its AI and driverless businesses.

To make matters worse, a new U.S. law could delist U.S.-listed Chinese stocks like Baidu if they don't comply with new auditing rules within the next three years. The SEC hasn't started that countdown yet, but that looming threat could limit Baidu's gains -- even if its growth accelerates again.

Baidu isn't worth buying right now

Baidu's stock looks cheap at 16 times forward earnings, but it deserves that discount because the company is growing slower than its industry peers, and its future looks murky. Therefore, investors shouldn't touch Baidu -- or any other big Chinese tech stock -- until we get a clearer view of the situation in China.