Baidu Inc (ADR) Stumbles -- Why This Could Be Your Opportunity

The Chinese search engine is investing in the future, and Wall Street does not like it.

Brian Stoffel
Brian Stoffel
Feb 13, 2015 at 10:22AM
Technology and Telecom

The outside of Baidu global headquarters, where lots more money is being spent right now. Photo: hwanghsuhui, via Wikimedia Commons

The parent company of the largest search engine in China, Baidu (NASDAQ:BIDU), reported earnings yesterday, and the market was not pleased. When stocks began trading on Thursday, shares of the company were down by as much as 6%, eventually down 4.5% for the day. While that may be disappointing for current shareholders, it should be music to the ears of those who are looking to purchase more of the Chinese giant.

Read on to find out why.

Short-term-itis at its finest
Baidu earnings results were certain to be disappointing for a market that likes to look days and weeks into the future, instead of years and decades. The company missed by a hair on revenues, a much larger margin on earnings, and offered up disappointing guidance for the first quarter of 2015.


Q4 Revenue


Q1 Revenue


$2.27 billion


$2.20 billion


$2.26 billion


$2.07 billion

Revenue outlook represents midpoint of management guidance. Source: E*Trade

While all of these may seem like minor blips, it is worth noting that the stock currently trades for about 34 times earnings, so any type of disappointment over the short-term was likely to have an outsized effect on the stock price.

But for long-term investors, an opportunity rears its head
Transitioning from a search company focused on PCs to mobile devices was not easy for Baidu, but it has now mastered the mobile realm. Revenue from mobile devices eclipsed PCs in December 2014 for the first time. That is crucial, as there are hundreds of millions of Chinese citizens yet to come online, and when they do, most will do so on a much more affordable mobile device.

But as fellow Fool Rick Munarriz discussed yesterday, that transition does not come without its drawbacks: "[A]dvertisers just don't want to pay as much to reach someone on the phone as they did on the desktop or laptop."

Pair that with R&D expenses that rose 69% and SG&A costs that ballooned 89%, and you can see how the pairing of lower revenue and higher spending could spook short-term investors.

But I suspect that this will not be the case for long. The same thing happened with Google and even Facebook -- companies wanted proof that ads on mobile devices were effective before they were willing to pay up for these impressions. So far, things have worked out quite well for the two companies, and I believe they will for Baidu as well.

Perhaps the most important oracle of things to come is provided by two separate reports from eMarketer. I have combined the figures to show how the advertising landscape will change in China over the next four years.

Chinese Advertising Spending, by Type of Media, in Billions USD | Create infographics

Between 2014 and the end of 2018, Chinese companies are expected to grow their advertising budgets from about $50 billion to $67 billion. What is astounding is that virtually every cent of increase between now and then is going to come from a shift to mobile advertising.

If there is one takeaway from the Baidu earnings release, it is this: Management knows about this trend and is investing everything it has into making sure that the company can capitalize on this once-in-a-lifetime shift.

We could talk until we are blue in the face about the fact that daily mobile searches per user were up 22%, that the company has a 42% market share in Chinese mobile apps, or that revenue from video has doubled in the past year.

But in the end, the chart above is the key to it all and helps the long-term investor understand that while slowing revenue growth may create short-term pain, focusing on lower-margin mobile ads right now is setting the company up for long-term dominance for years to come.