There's a lot riding on Wednesday night when Baidu (NASDAQ:BIDU), China's leading search engine, reports its latest financial results. The original dot-com darling in the world's most populous nation has seen its stock hold up well -- even when many of the country's other Internet speedsters have fizzled out -- placing more pressure on Baidu to not disappoint historically fickle growth stock investors.
Expectations are high leading up to the first-quarter report, as long as we stop at the top line. Analysts see year-over-year revenue growth of 36%. That's a big jump, but it's actually well off Baidu's previous top-line spurts. Quarterly revenue climbed 48% in its most recent report and 54% for all of 2014.
Things get hairier as we work our way down the income statement. Baidu is investing in low-margin niches, and it doesn't help that its stronghold of search is growing more competitive. Baidu still commands roughly two-thirds of the search queries on PCs in China, but a feisty competitor is nipping at its heels at a time when it's putting money to work in areas outside of search and countries outside of China. The end result of all of these moving parts as we crawl our way down Baidu's income statement is that profitability is expected to go the wrong way this quarter. Wall Street's forecast calls for earnings per share to decline 11% relative to the prior year's profit during the same quarter.
This won't necessarily sting the stock come Thursday morning when stateside exchanges get going again. Analysts are obviously already braced for decelerating top-line growth and a year-over-year dip in profitability. The market gets what Baidu is doing, particularly in mobile. The market was concerned a couple of years ago that Baidu had all of its eggs in the desktop search basket. Baidu seemed as if it were going to miss out on the growing searches performed on smartphone and tablet devices as the mobile computing revolution began to play out in China, but then it made a couple of shrewd acquisitions. By the third quarter of last year mobile was generating half of Baidu's search traffic.
It's true that Baidu was milking more of a profit out of every sale a couple of years ago. Net income margins peaked at 46.9% in 2012, according to S&P Capital IQ data. They went on to slide to 32.9% in 2013 and 26.9% in 2014. That trailing figure should dip again after another quarter where earnings fail to keep up with revenue growth.
This hasn't been a deal breaker for investors. Baidu shares have more than doubled since margins peaked at the end of 2012. We know that advertisers are paying less for leads generated on mobile devices -- for now -- and that Baidu is setting itself up as a more well-rounded company for the future. The market seems more concerned about Baidu's top-line growth, a line that should grow instead of contract as the dot-com behemoth expands its reach. Its revenue guidance on Wednesday night will go a long way in determining the stock's direction on Thursday.
All eyes will be on Baidu on Wednesday, and deservedly so.
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.