Shares of Baidu (BIDU 0.29%) hit a 52-week low on Friday. Let's take a look at how it got here and see if cloudy skies are still in the forecast.
How it got here
"What goes up, must come down" isn't always true when it comes to stock investing, but gravity appears to be exerting its pull on high-flying Chinese search engine Baidu.
Baidu, which reported its third-quarter results three weeks ago, surpassed Wall Street's profit expectations by $0.09, but its net revenue of $994.6 million fell short of the roughly $1 billion analysts were anticipated. What's more, Baidu's fourth-quarter revenue forecast range of $979 million to $1.01 billion is markedly below the $1.03 billion the Street was expecting.
Baidu's slower growth forecast could relate to a number of factors. To begin with, China's GDP growth has been slowing, clocking in at just 7.4% in the third quarter. You might think 7.4% GDP growth sounds fantastic, but relative to China's three-decade average of 10%, it's not that great. That slowing growth appears to be impacting advertising spending, which is a negative for Baidu.
It's also possible, as my Foolish colleague Andrew Tonner pointed out, that Baidu's competitors are beginning to chip away at its currently dominant market share, even as advertising spending appears to be tightening. SINA (SINA) reported an 18% increase in revenue last week as sales topped Wall Street's estimates (although its ad revenue guidance fell well short of expectations). Similarly, Sohu.com (SOHU 0.27%) recorded a 23% boost in total revenue and a 102% spike in search revenue for the third quarter.
How can Baidu turns its frown upside down
Hope is anything but lost for Baidu, which grew revenue by 52% in its latest quarter. Up first on its list of wants and needs to grow its business is a focus on cloud computing and mobile. Yahoo! (NASDAQ: YHOO) has been trying to expand its search and ad operations into mobile without much success under previous CEOs, so hopefully Baidu (and now Yahoo! under Marissa Mayer) will be considerably more successful. With mobile devices growing cheaper and China's middle-class growing, Baidu's market for mobile ad dollars is huge.
Another factor that will help Baidu remain dominant in China is Google's (GOOGL -0.20%) inability to penetrate the market. China's tough censorship laws caused Google to pull its search engine operations out of China two years ago and it appears unlikely that it'll be welcome back into China anytime soon. This means Baidu can focus its attention on domestic peers SINA and Sohu.com without worrying about Yahoo! or Google.
What's next
Now for the $64,000 question: What's next for Baidu? The answer depends on Baidu's ability to drive advertising revenue through mobile and cloud-computing investments, as well as how conducive the Chinese economy is to coercing businesses to spend on advertising.
Our very own CAPS community gives the company a three-star rating (out of five), with 87.9% of members expecting it to outperform. Personally, I've been far less upbeat about Baidu's valuation, and my CAPScall of underperform is currently up 44 points.
Admittedly, I'm getting a closer to closing out my underperform call on Baidu with the high-growth search engine now trading at just 16 times forward earnings. However, I'm still a bit concerned that China's economy hasn't quite hit its trough yet, which means ad spending could weaken even further. With Sohu's Sogou and SINA's search engines beginning to claw away market share from Baidu, it wouldn't be surprising to see Baidu head even lower.
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