The boardroom is getting a makeover at Baidu (NASDAQ:BIDU), but at least one Wall Street pro doesn't seem to care. China's leading search engine is adding Brent Callinicos and Yang Yuanqing as directors.
Callinicos was Uber's CFO until stepping down earlier this year. He was previously treasurer and chief accountant at Baidu rival Google. Yuanqing is currently the chairman and CEO at Lenovo.
This would seem to be a net positive for Baidu, but that didn't stop Summit Research from downgrading the stock yesterday. The firm is lowering its rating on the stock to hold, slashing its price target from $205 to $150.
Analyst downgrades happen all of the time, particularly for a company in Baidu's position where costly initiatives to improve its role in China's online-to-offline -- or O2O -- revolution is gnawing away at profit margins and bottom-line growth. However, what makes this move unique is that Summit Research had just reiterated its bullish buy rating and $205 price target late last week.
Summit analyst Henry Guo issued last week's note in response to Baidu's deal with Microsoft, where Baidu's leading search engine will become the default homepage and search provider for Windows 10's Edge browser in China. Baidu, in turn, will promote Microsoft's new operating system in the world's most populous nation.
Guo wasn't necessarily excited about the partnership. He only saw it as a modestly positive growth catalyst for Baidu, generating more favorable headline attention than an actual boost in fundamentals. However, he could have simply used the news to turn bearish then instead of putting out a new note just a few days later.
Guo isn't the first analyst to turn on Baidu this year on fears that its O2O dreams can be hazardous to the stock in the near term. Deutsche Bank also downgraded the stock last month, slashing its price target from $206 to $170.
Baidu wants to be more than just a search engine, using its dominance in that lucrative niche to serve as the springboard to be a major player in everything from streaming video to app marketplaces to travel bookings.
It's easy to justify Baidu's push into new markets that may not pay off right away. It has a whopping $12.1 billion in cash and short-term investments on its balance sheet at a time when the market's ignoring Chinese growth stocks. It can use some of its bountiful greenery to prop up its stock with buybacks -- and its board authorized $1 billion in repurchases this summer -- but why not invest some of that in areas that will grow in relevance in the future?
The rub with the O2O push is that it's killing profit growth in the near term. Analysts have slashed their profit targets on Baidu by 20% for 2015 and 22% for 2016 over just the past three months. Revenue growth continues to impress, but folks who limit their investments to the superficial analysis of profit multiples aren't sticking around. Tack on concerns of China's overall slowing economic growth and you have a recipe for apathy.
Baidu's going to have to earn its way out of this funk, and that's a tall order when analyst forecasts are going the wrong way.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu, Google (A shares), and Google (C shares). The Motley Fool owns shares of Microsoft. 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.