Slumping shares of Baidu (NASDAQ:BIDU) find China's leading search engine in a rare position of not crushing the market. It's losing, and losing badly. If the stock doesn't bounce back in a major way between now and the end of December this would be just the third year that Baidu closes lower since going public at a split-adjusted price of $2.70 in 2005.
This is also shaping up to be Baidu's worst year since 2008.
The stock had been rolling before shifting into reverse this year. Baidu stock followed up a 77% surge in 2013 with a 128% burst last year.
It's been a different story this year with the shares shedding roughly a quarter of their value. Let's go over a few of the things that could bring back the winning spirit before it whiffs for the third time over the past decade.
1. Earnings growth can bounce back
Margins have been squeezed as Baidu pushes into less profitable areas outside of its stronghold of search. Analysts knew this, but they underestimated the impact of what expanding into digital video, online travel, and app marketplaces would do to Baidu's bottom line. Baidu -- a market darling that would routinely trounce Wall Street expectations -- has fallen short of profit targets in two of the past three quarters.
Improvement at any of its non-search categories can go a long way to reversing the year-over-year slide in margins that has been relentless since mid-2012, according to S&P Capital IQ data. It's unlikely to happen anytime soon, but if Baidu offers up a rosier prognosis on the direction of margins in the future it can help lead a bullish run.
2. Baidu can make more head-turning acquisitions
The market figured that Baidu would be lost in the migration from PC to mobile, but then the Chinese dot-com changed the narrative by acquiring a leading developer of app hubs. The market responded favorably, even if it's now kicking Baidu because of the lower margins.
Baidu's latest quarter wasn't very impressive, and analysts have responded by slashing their profit forecasts. If Baidu finds a way to broaden its reach -- either geographically with existing businesses or through outright purchases that move the needle -- it will make it easier for investors to accept the lull. With $12.1 billion in cash and equivalents, the money is certainly there to go shopping again.
3. Revenue growth can accelerate
Another way to make the market forget that the bottom line has been challenging is to make sure that its top line is humming along smoothly. Revenue growth accelerated in 2014, but it decelerated sharply during the first quarter of this year. It made some of that back by accelerating slightly during the second quarter since the first quarter's pace, and that's a trend that could help the stock if it continues through the second half of the year.
Baidu's stock has taken a big hit in 2015, and the same can be said about its earnings. However, it's still not too late to turn things around.
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.
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