Despite Beating Estimates, Baidu Shares End Lower

For the March quarter, Baidu reported earnings of $1.00 per share on revenues of $2.45 billion. The Street consensus going in to the earnings event was $0.86 per share on revenues of $2.44 billion. So, a nice beat on the bottom-line and let's call it a meet on the top-line.

For the current quarter ending in June, Baidu said revenues would come in between $2.974 billion and $3.048 billion which gives us $3.01 billion at the mid-point versus Street consensus of $3.03 billion.

Shares of Baidu ended lower by $7.63 per share or down 4.1% this Friday at $180.23 per share.

The company lost about $3 billion in market cap as obviously Wall Street and investors were expecting more from Baidu.

Missed in the slide this Friday is the fact that Baidu's guidance actually called for a year-on-year increase in revenues of 13.5% at the mid-point and a 22.7% increase (also at the mid-point) on a sequential quarterly basis.

On a year on year basis, that sort of growth rate is almost on par with Google and better than Google on a sequential quarterly basis.

Investors and traders also seem to be disturbed by the fact that Jennifer Li, Baidu's CFO for nine years, was moving on to a different role at the company. She will be, after finding a replacement CFO, heading Baidu Capital, the newly formed investment arm of the company.

I think investors were most perturbed by the data-point that active online marketing customers were down 23.2% YoY to 451,000 while choosing to ignore the fact that revenue per online marketing customer was up 26.8% YoY to $4,600 (using $1=RMB 7). 

I am not sure about everyone else, however, a smaller number of customers paying 25% more is not altogether a bad thing. The company more than likely weeded out the bad actors that had been using deceptive ads to lure in customers which is what got Baidu into this situation of slower temporary growth starting a year ago.

Yes, Baidu's growth has slowed temporarily and the company remains in the penalty box for now. However, from the March quarter results, it's obvious that Baidu has taken the right steps going forward and that the days of stronger growth lie ahead once again.

Here are a couple of positives to consider:

  • Mobile contributed 70% to total revenues, up from 65% in the prior quarter and up 60% year on year.
  • Operating profit came in 43% better than Street consensus

In my opinion, Baidu could return to 20% growth by the next quarter which means multiple expansion could start just about anytime now.

China's online advertising market is still in the nascent stage compared to here at home and Baidu is not known as the Google of China for nothing. It is the dominant online search engine in China and as such deserves a far higher multiple that it is currently valued at.

In the current market environment, where almost everywhere you turn, the gurus/swamis/pundits/kindly uncles/darksiders are spouting "end of days" from every street corner, it is extremely easy to get taken in by the constant and consistent negativity, which is exactly what they want you to do.

After all, misery loves company, no?

I have a small long position in Baidu via further dated calls after having sold our nearer-term position ahead of the earnings event for just under a triple.

(Long bidu calls, google, long and short google options)

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