There's Bullishness in Baidu Stock Bearishness

Two more analysts lower their price targets on China's leading search engine.

Rick Munarriz
Rick Munarriz
Oct 13, 2015 at 3:13PM
Technology and Telecom

Source: Baidu. 

Wall Street continues to give Baidu (NASDAQ:BIDU) an icy stare down. Two more analysts have hosed down their opinions of where shares of China's leading search engine will be in the near future.

Credit Suisse lowered its price target late last week, going from $225 to $205. UBS analysts Erica Poon Werkun and Angela Xu followed on Monday, slashing their goal from $235 to $214.

On the surface it isn't as bad as it seems. The actual stock ratings at both firms remain intact. Judging by where Baidu stock closed Monday the price targets at Credit Suisse and UBS represent upside of 42% and 49%, respectively. That would be a great one-year return for any growth investor.

However, it's also important to read into the timing of the hosing down of Baidu price targets on back-to-back trading days. The analysts at Credit Suisse and UBS both mentioned last week's announced merger of Meituan and Dianping, two companies that may not be household names to stateside investors but they are rivals to Baidu's Nuomi group-buying site that happen to be backed by a couple of Chinese dot-com tech giants.

Online-to-offline -- or O2O -- has become the rallying cry at Baidu. It's investing heavily in making sure that it's a leading player in O2O, and that has come at the expense of near-term margins at Baidu. As Werkun and Xu point out, Baidu's Nuomi was already engaging in heavy promotional activity in the weeks leading up to the Meituan-Dianping merger announcement. Now that it will be facing a combined rival with post-merger synergies it's a safe bet that Nuomi will continue its heavily promotional ways. Both UBS and Credit Suisse see rising overhead to remain competitive with profitability sliding along the way.

It's easy to be concerned about Baidu's profitability. The pursuit of a position in leadership in everything from group-buying to streaming video to app marketplaces has been brutal to Baidu's bottom line. Year-over-year revenue growth has outpaced earnings growth for 11 consecutive quarters, according to S&P Capital IQ data. Shrinking margins leave Wall Street pros with little choice but to slash their profit targets, and in this valuations-driven world where many fail to appreciate investing now for the future it's going to weigh on where the market thinks the stock should be.

It could have been worse. The two analyst moves are rosy compared to Summit Research downgrading the stock, slashing its price target from $205 all the way down to $150. Credit Suisse analyst Dick Wei's new price target of $205 is where Summit drew the line before it turned bearish. A few weeks before Summit's move we had Deutsche Bank downgrading the stock as it lowered its price target to $170.

Investors should gladly accept the latest price targets north of $200. However, they will also want to keep a close eye on Baidu when it reports in a couple of weeks. Analysts may be resigned to the fact that Baidu's financials are going to get ugly in the near term, but any insight into how ugly things will get before margins begin to expand again will go a long way in determining which way the stock ultimately travels.