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A Wall Street Pro Cools on Baidu

By Rick Munarriz – Sep 9, 2015 at 11:00AM

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Deutsche Bank lowers its price target on China's leading search engine.

Source: Baidu. 

You can't woo them all, Baidu (BIDU 0.44%). At least one Wall Street firm walked away concerned from Tuesday's Baidu World event where China's leading Internet search provider offered updates on its latest initiatives.

Deutsche Bank analysts are lowering their near-term profit forecasts and price target for Baidu, fearing that the tech giant is too smitten with its margin-draining online-to-offline, or O2O, push. The firm is lowering its price target from $206 to $170. That represents a mere 15% of upside based on Tuesday's close, and that might not be enough for some investors to take on the risk of buying into one of China's more prolific growth stocks.

Baidu announced some pretty neat things on Tuesday. The headline grabber is Duer, an interactive digital assistant that finds Baidu throwing its hat into the same ring as Siri, Cortana, and Google Now. However, Baidu also shed some light on a wide array of new and newish initiatives that include everything from an online marketing platform to a cloud-based healthcare services manager.

There was also DuLight, a smart wearable voice-enabled device that uses computer vision, face recognition, and speech recognition to assist the visually impaired. Baidu also showed off FaceIt, an iOS app -- yes, Baidu's playing nice with iPhone and iPad users -- where folks can swap faces in digital snapshots with their friends or even celebrities.

Baidu has a lot of neat things either in the market or on the way. That may pay off in the long run, but Deutsche Bank analysts Alan Hellawell III and Vivian Hao are more concerned with what all of these initiatives will do to suppress profitability. They now see earnings growth of just 21% next year (down from 29%) and 30% come 2017 (down from 44%).

Chinese stocks have generally been out of favor since Baidu peaked just shy of $252 late last year. However, Baidu hasn't helped its standing by putting its high-margin search money to work in low-margin niches including online video, group buying, and app stores. With its clear mandate to invest even more in O2O, profitability has taken a hit and analysts continue to hose down their profit targets.

This doesn't have to end badly. Earnings growth can bounce back, but the more likely catalyst to a rally in Baidu shares is if some of these initiatives begin to move the needle sooner than expected.

Some may argue that this is a tricky time for the dot-com darlings of the past. The shift from PC to mobile has eaten into monetization, and the push to branch out into new categories isn't going to clean up nicely on the bottom line in the near term. However, Baidu is placing so many eggs into so many baskets -- there is no single O2O basket -- that it wouldn't be a surprise if it's investing today in one of tomorrow's big winners.  

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns and recommends Baidu. 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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