Baidu's (BIDU 0.98%) stock price declined by nearly 7% on Tuesday following the release of its second-quarter earnings report. The Chinese tech giant's revenue fell by 5% year over year to 29.65 billion yuan, or $4.43 billion, but still exceeded analysts' expectations by $230 million.
Its adjusted net income rose 3% to 5.54 billion yuan ($827 million), or $2.36 per American depositary share, which also topped the consensus forecast by $0.79 per share. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) slipped by 3% to $7.05 billion ($1.05 billion), but its adjusted EBITDA margin expanded both sequentially and year over year to 24%.
Image source: Getty Images.
In sum, Baidu's numbers weren't terrible, but they didn't generate much fresh interest in its stock, which has declined by about 10% over the past 12 months and lost nearly 40% of its value over the past five years. Let's review the bear and bull cases, and make a prediction about whether or not Baidu's stock price can bounce back this year.
What the Baidu bears say
Those who are bearish about Baidu will tell you that the company's core online marketing business, which accounted for 58% of its revenue in the second quarter, remains highly exposed to macroeconomic and competitive headwinds. Baidu generates most of its online marketing revenue from its namesake search engine (which controls over 70% of China's online search market, according to StatCounter), managed business pages, and display ads.
This business faces intense competition from Tencent's (TCEHY 3.23%) advertising platforms -- which include WeChat, Tencent News, and its streaming media platforms -- as well as rapidly growing media platforms like Bilibili and third-party e-commerce marketplaces like Alibaba's (BABA 2.92%) Taobao and Tmall. The recently sluggish growth of China's economy, which has been exacerbated by its intermittent COVID-19 lockdowns in key cities, has also been throttling the growth of the entire ad sector.
Baidu also generated 23% of its Q2 revenue from its streaming video subsidiary iQiyi (IQ 5.24%). That platform has been struggling with tough competition from similar freemium platforms like Tencent Video and Alibaba's Youku Tudou, which has led to ongoing losses of paid subscribers and declining advertising revenue from its free viewers.
Management has been trying to offset the declines of its online marketing and iQiyi segments by expanding the "non-online marketing" segment which houses the company's cloud platform and AI services. But as the following chart illustrates, the growth of that segment also cooled off over the past year and is no longer offsetting the weaknesses of its other businesses.
|
Metric |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
Q2 2022 |
|---|---|---|---|---|---|
|
Online marketing revenue growth (YOY) |
18% |
6% |
1% |
(4%) |
(10%) |
|
iQiyi revenue growth (YOY) |
3% |
6% |
(1%) |
(9%) |
(13%) |
|
Non-online marketing revenue growth (YOY) |
80% |
76% |
63% |
35% |
22% |
|
Total revenue growth (YOY) |
20% |
13% |
9% |
1% |
(5%) |
Data source: Baidu. YOY = year over year.
What the Baidu bulls say
Those who are bullish about the tech company believe Baidu can stabilize its online marketing business by pivoting more advertisers from traditional ads toward managed business pages, which accounted for 49% of the segment's revenue in the second quarter. With these "one-stop shop" pages, Baidu handles a company's entire online presence -- and tethers the client more tightly to its other online services.
Baidu can also widen its moat against Tencent's WeChat by expanding its own mobile app, which grew its monthly active users by 8% year over year to 628 million during the second quarter. Like Tencent, Baidu also lets companies develop "smart mini programs" that can be run within the walls of its mobile app.
As for iQiyi, Baidu has reportedly been in talks to sell its stake in the struggling streaming video unit for as much as $7 billion. Such a sale would alleviate a lot of pressure on its bottom line, and would make sense in the context of its recent moves to divest itself of other non-core assets. However, it could attract the attention of antitrust regulators.
Baidu's AI Cloud ranks fourth in China's cloud infrastructure market after Alibaba, Huawei, and Tencent, according to Canalys. But the growth of AI Cloud outpaced most of its peers in the second quarter, when its revenue rose 31% year over year. By comparison, Alibaba's cloud revenue only rose 10% in its latest quarter, while Tencent's "fintech and business services" revenue -- which mainly comes from Tencent Cloud and WeChat Pay -- grew by just 1% last quarter. That robust growth could eventually offset the slower growth of Baidu's marketing business.
Lastly, the threat of a mass delisting of Chinese stocks from U.S. markets is still depressing Baidu's share price. If Chinese and U.S. regulators finally reach a deal that avoids that messy exodus, Baidu will likely rally along with other Chinese stocks.
Its weaknesses don't outweigh its strengths yet
Baidu's stock looks historically cheap, trading at 23 times next year's expected earnings and 2 times next year's expected sales, but I wouldn't consider it a bargain yet. Its growth could remain anemic for the foreseeable future, and any negative news about China -- including more COVID lockdowns, sluggish economic growth, and geopolitical tensions -- could drive its shares lower. Therefore, I wouldn't buy Baidu until it stabilizes its online marketing business, divests itself of iQiyi, and makes more progress in the cloud market.
