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3 Reasons Why I’m Staying Away From Baidu Shares

By Motley Fool Staff - Oct 2, 2019 at 7:52AM

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Baidu's shares have been falling for some time. Here are three reasons why I won't be investing in it any time soon.

Baidu Inc (BIDU -3.98%) is a Chinese company well known for its search engine and online advertising business. Its success can be highly attributed to Google's departure from China in 2010.

But in an increasingly competitive technology landscape, you might want to consider alternative technology giants such as Tencent Holdings Ltd (SEHK: 700) and Alibaba Group Holding Ltd (NYSE: BABA). That's because Baidu has been on a downward trend for some time. Although bargain hunters may be rejoicing, here are three reasons why I'm staying away from Baidu Shares.

Man touching a virtual magnifying glass in a search engine.

Image Source: Getty Images.

1. Slowing growth

Since Google's departure from China in 2010, Baidu has essentially enjoyed a monopoly in the search engine space – deriving over 70% of its revenues from that business segment. Unfortunately for Baidu, ByteDance, one of China's largest phone app producers, recently launched a search engine that will directly compete with Baidu's bread-and-butter business.

Should ByteDance continue to grab market share from Baidu in this space, its growth will further decelerate. Furthermore, with the slowdown in the Chinese economy, US-China trade uncertainty, as well as existing competition from companies like Tencent's WeChat's advertising business, Baidu will struggle to deliver the growth numbers shareholders were accustomed to back in its glory days.

2. Decreasing margins

During its Q1 2019 earnings, Baidu reported its first loss ever since it floated on the stock exchange in 2005. In 2019 alone, the stock price has fallen by more than 30%; its share price has more than halved in value, with its 52-week high at $234.88 but a current share price that sits at about $98 (as of the time of writing).

Additionally, Baidu has been seeing increasing costs in many areas. For instance, the company's Traffic Acquisition Cost has increased 27% year-on-year, further depressing its already dwindling margins.

3. Capital intensive investments with dim outlook

In a bid to diversify its revenue streams away from online advertising, Baidu has recently begun investing heavily into artificial intelligence (AI) technology such as autonomous driving and smart speakers.  These are not only capital-intensive technologies in and of themselves, but the cost of talent required to research and develop AI is also very high.

Autonomous driving is also a maturing technology, and so the return on investment will not likely be in the near term – something that Baidu urgently requires to boost its slowing growth. Baidu's competition in the smart speakers space is also intense, with large technology companies such as Alibaba already securing bigger pieces of the pie.

In order to gain market share, Baidu has priced its smart speakers below their competitors, losing around RMB 200 per unit; this is a significant loss, seeing that the company shipped almost 12 million smart speakers since 2018 until the end of Q2 2019.

Foolish takeaway

While Baidu is a company that will not be made irrelevant any time soon, it is also not the most attractive company for investment purposes. Its slowing growth, decreasing margins and poor outlook in investments are issues for the foreseeable future.

I would suggest investors perhaps look to strong-performing companies such as Alibaba and Tencent if you are looking to invest in the Chinese technology space.

A version of this article originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Baidu. The Motley Fool recommends Tencent Hldgs. The Motley Fool has a disclosure policy.

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