Baidu is Still Searching for Growth Spark(1)

8/19/2019 Baidu is Still Searching for Growth Spark(1)

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Baidu Is Still Searching for Growth Spark

Shares are up 23% this month but investors await proof that spending can renew

earnings growth.

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B) IS*BE((* +,#-G

#ctober 3! 2!/0

1isitors sit on sofas below the Baidu Inc. logo in the reception area of the compan)s

headuarters in Bei4ing "hina. hotographer5 &omohiro #hsumi6Bloomberg

It7s said the secret to happiness is low e8pectations. Baidu7s latest uarterl) result is

a case in point.



Shares in "hina7s internet search giant 4umped roughl) 9% in after:hours trading on

&hursda) after its third uarter earnings e8ceeded low anal)st estimates. But a beat

is a beat and the surging share price built on a strong rall) in Baidu ; BI<= > shares

so far in #ctober with the stock up 23% for the month.

?hile investors cheered the results Barron7s *sia believes the stock will struggle to

rall) much from current levels. &he growing pains that have bedeviled Baidu driving

a @2% fall in its shares from the start of the )ear to its lows in September are likel)

to persist. &he stock looks relativel) e8pensive on a number of valuation measures

as we await proof its big ticket investments can deliver growth.

"hina7s largest search engine has been grappling with the same problem that its=.S. counterpart *lphabet ; G##G( > nee Google faced a couple of )ears ago5

inding new sources of growth as the search market matures and slows. Baidu has

been treading the same path as Google b) branching into faster growing areas of

the web and taking a Abuild it and the) will come approach.

Investing in growth is admirable but it has come at the cost of a sueeCe on

margins. Baidu is throwing capital at its fora) into online:to:oDine ;#2#> e:

commerce through investments such as group bu)ing platform -uomi while it has

reached into internet videos through its ou&ube:like website iFi)i. &he pursuit ofgrowth has inated costs at a time when revenue growth is slowing. It was the

sueeCe on margins that compelled this column to take a downbeat view of Baidu

and recommend Google as the more promising near:term pla) of the two search

giants in late Hul). Google shares have gained /3% since compared to a /3% fall in

Baidu shares.

Barron7s *sia coverage of "hina7s Internet stocks

"trip.com "an $ise 20% as Sector "onsolidates #ct.2J 2!/0

*re "hinese Internet Stocks ?orth the $iskK #ct.2! 2!/0

?h) Souun7s Slumping Shares "an Surge 9!% : Sep./9 2!/0



Baidu is Searching for &hat Google Lagic Hul.2J 2!/0

"hina7s Internet Stocks Lerit a (ook Hul.// 2!/0

*t M/J! a share Baidu is pricier than Google parent *lphabet on both a price:to:

earnings and price:to:book basis. &he "hinese search provider trades at 29 times

forward /2:month earnings and N.0 times book while *lphabet fetches 22 times

forward earnings and @.@ times book. But the premium multiples haven7t been

accompanied b) a premium growth performance. Baidu hasn7t delivered better

growth than its =.S. counterpart and the performance gap has onl) widened in the

third uarter.

Baidu7s third uarter proOt fell 29% to M@@9 million the second time this )ear

uarterl) earnings have fallen. roOt dropped 3.@% in the Orst uarter. *lthough the

bottom line number landed well above the consensus forecast of M/.20 in earnings

per share this can be attributed to overCealous cuts to estimates b) anal)sts. &he

consensus third uarter earnings forecast had been sitting at M2.!J a share in late

Hul).

Leanwhile *lphabet scored another * on its scorecard in the third uarter growing

earnings at a @0% )ear:on:)ear pace and bettering a /9% )ear:on:)ear rise in the

second uarter. It also doesn7t help that rival "hinese Internet giant *libaba ; B*B* >

delivered a 32% )ear:on:)ear 4ump in third uarter earnings.

Baidu7s weak earnings are largel) due to its heav) investment spending. Selling

general and administrative e8penses for the third uarter more than doubled

compared to a )ear ago while research and development e8penses increased @9%.

-et proOt margins fell to /0% from 2P% a )ear ago.

?hile 3N% revenue growth would be the env) of man) companies it7s a marked

deceleration from the 02% )ear:on:)ear clip Baidu racked up in the third uarter of

2!/@. *lthough the compan) gave what "I"" anal)st ,aofei "hen sa)s is

Asurprisingl) strong guidance for the fourth uarter the 32% to 3N% )ear:on:)ear



e8pected growth in revenues : e8cluding online travel group Funar : is weaker than

the @9.0% pace in the same period a )ear ago.

Largins are likel) to remain under pressure as Baidu ploughs on with its aggressive

spending including the "-2! billion to be invested in -uomi over the ne8t three

)ears. ,SB" anal)st "hi &sang e8pects Baidu to front:load spending into the ne8t /J

months to accelerate user adoption and market share gains. ,owever &sang who

has a bu) rating on Baidu e8pects the compan)7s margins to bottom out at /@%

this )ear before recovering to roughl) /N% in 2!/0.

*nother reason to be optimistic is Baidu like Google is embracing corporate

restructuring as a means to create shareholder value. *n e8ample is the recent

share e8change with online travel group "trip.com International ; "&$ >. Baidu7s

core search engine business also remains strong and highl) proOtable notes ,SB"7s

&sang and mobile search is delivering decent growth in user numbers. &he

compan)7s #2# investments are seeing growth momentum although competition in

the e:commerce segment is ver) intense.

,owever with proOts likel) to on the back burner in the near term as Baidu focuses

on investing aggressivel) in new source of growth it7s a good idea for investors to

leave the stock on the shelf for now.

Baidu is Still Searching for Growth Spark(1)

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