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Everybody Loves Baidu Again

By Rick Munarriz – Mar 21, 2016 at 4:00PM

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China's leading search engine hits a new 2016 high to close out the week, but there are some potential pitfalls to Baidu.

Image source: Baidu. 

Shares of Baidu (BIDU 8.99%) keep inching higher. China's leading search engine has seen its stock close higher for three consecutive trading days, and on Friday it hit its highest close of 2016.

This doesn't mean that Baidu stock is anywhere close to its all-time highs. The reborn dot-com darling finds itself trading 25% below its peak set in late 2014. However, Baidu stock is also trading 35% higher since bottoming out last month.

There are several positive catalysts at Baidu these days.

  • Baidu is coming off of a well-received quarter where revenue growth may have slowed to 33% but its profit vastly exceeded analyst expectations for the second quarter in a row.
  • The Wall Street Journal reported on Wednesday that Baidu is hoping to start testing self-driving cars in the U.S. soon, eyeing a commercially viable model in the market as soon as 2018. The report stems from an interview the paper had with its chief scientist. It's an ambitious goal, but at the very least it suggests that Baidu has bold plans for a greater stateside presence. 
  • Baidu's making moves to beef up its margins, and last month it announced that two major executives including its CEO had plans to take its profit-slurping streaming video site private. This could be a case of addition through subtraction, at least for investors pressing for near-term improvement in margins and profitability. It also only helps that Baidu stands to score $2.25 billion in proceeds if the deal goes through.

Besting Wall Street's profit targets, taking an early market leadership position in the inevitable autonomous car niche, and focusing on its fiscally successful businesses could go a long way to get Baidu stock back to where it was when it peaked 16 months ago.

Momentum is finally in its corner after meandering through 2015, just the third down year for Baidu stock in its celebrated history as a public company. This doesn't mean that these potentially promising catalysts can just as quickly deteriorate.

Baidu's guidance calls for the current quarter to be another period of decelerating growth. The market for self-driving cars is one this is likely to have more than a few speed bumps and obstacles along the way to becoming a market reality. Finally, we have to remember that Baidu unloading assets that aren't turning a profit places the emphasis again on its flagship search engine. That's a good place to be concentrated, one would think, but it was also a stance that bored investors until Baidu began snapping up new businesses and platforms. Baidu may seem as if it can't lose these days, but the more challenging dilemma is that finding ways to win may be even trickier.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of 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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