Sometimes the market expects too much out of its dot-com darlings. Shares of Baidu (NASDAQ:BIDU) initially dipped after posting disappointing quarterly results on Wednesday afternoon.
China's leading online search engine saw revenue climb 47.5% to $2.264 billion. Net income climbed 16% to $520.4 million or $1.45 a share.
It's not a surprise to see revenue growing faster than profitability. Baidu is investing in everything from video portals to mobile app marketplaces. These are margin-squeezing businesses that will never be as lucrative as its high-margin flagship business of paid search.
However, even adjusting for Baidu's broadening pursuits, it was a rough quarter. Analysts were holding out for a profit closer to $1.60 a share on $2.27 billion in revenue for the period. Baidu missed the top line by a smidgeon, but it landed well below the market's income forecast.
"Nothing would give the stock a bigger shot in the arm than improving its margins," I suggested two days ago. That didn't happen, obviously. Instead of a shot in the arm, Baidu missed and shot itself in the foot.
You don't have to look hard to find a culprit: mobile. A couple of years ago, investors were bailing on Baidu because it didn't have enough exposure to the smartphones and tablets that were fueling a growing number of online experiences at the expense of Baidu's PC stronghold. Now that Baidu has succeeded in making mobile a priority -- snapping up the leading mobile apps marketplace and pushing into areas that are more mobile-centric -- we're finding that advertisers just don't want to pay as much to reach someone on the phone as they did on the desktop or laptop.
This isn't a phenomenon limited to Baidu. Stateside dot-com giants have also struggled with lower rates per clicks and views. In a telling pair of stats from Baidu's third quarter, mobile traffic accounted for more than half of the company's traffic during the period for the first time, but revenue accounted for just 36% of the mix. Mobile revenue accounted for 42% of the total revenue this time around -- and actually more than half of the revenue during the month of December -- but it just goes to show that mobile monetization still has a long way to go here.
The migration to mobile is going to sting this year. Baidu is targeting $2.038 billion to $2.106 billion in revenue for the current quarter, representing a sequential slide and a 33% to 38% year-over-year increase. Seasonality explains sequential dips at Baidu, but analysts were still holding out for a 44% year-over-year advance.
Baidu doesn't offer bottom-line guidance, but if margins continue to be challenged -- and that seems to be the case -- a big miss on the top line this quarter should result in an even bigger hit on the other end of its income statement. Baidu is still growing quickly. It remains China's top dog in paid search and online advertising. However, it will need to beef up its margins and its mobile monetization this year. Fixing one should fix the other.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.