Baidu Earnings Review Q3 2014

  • In Q3 2014, Baidu missed revenue estimates marginally and beat earnings estimates.
  • Revenue growth remained impressive. Improvements were seen in profitability and other metrics.
  • Q4 2014 revenue guidance and implied full year revenue based valuations indicate potential upside.
Baidu Earnings Review Q3 2014

Baidu (BIDU) reported its earnings for Q3 2014 on 29 October. The Chinese internet search giant missed revenue estimates marginally, but beat Adjusted EPS estimates by a healthy margin. In spite of the marginal slowdown in revenue growth, growth rate clubbed with expansion into Brazil make Baidu attractive. Baidu’s profit margins showed marginal improvements over the levels seen in FY 2014 so far. Based on its Q4 2014 revenue guidance and the implied full year guidance, we see an upside potential to Baidu valuations from its current stock price of $224.5 a share.

Baidu Earnings Estimates vs Actuals for Q3 2014

In Q3 2014, Baidu’s revenue of RMB 13.52 ($2.203 billion) was closer to the lower end of its guidance range of RMB 13.42 – RMB 13.78 billion.

Estimates

Actuals

Beat/Miss

Revenue (RMB billion)

13.55 ($2.208 Bn)

13.52 ($2.203 Bn)

-0.2%

Adjusted EPS (RMB)

10.37 ($1.69)

11.67 ($1.90)

12.5%

Note: All currency conversions from RMB to USD are based on the exchange rate used in Baidu’s earnings release. 1 USD = RMB 6.1380

Baidu Revenue Growth

In Q3 2014, Baidu’s revenue grew by 52% YoY (over Q3 2013) and 12.8% sequentially. Baidu’s revenue growth slowed from 58.5% seen in Q2 2014. However, growth in Q3 was much better than the 42% YoY growth recorded in the same quarter a year ago.

Baidu Revenue Growth

Baidu continued to generate bulk (99.3%) of its revenue from online marketing. The number of online marketing customers grew 11.2% YoY and 5.7% sequentially while revenue per online marketing customer grew by a healthy 35.6% YoY and 7% over Q2 2014.

Traffic Acquisition Costs (TAC) moved up to 12.9% of total revenue from 12.7% in Q2 2014 and 11.7% a year ago.

Note: All growth rate computations are based on figures in RMB to focus on operating performance and exclude the impact of forex currency conversion rates.

In Q3, Baidu earned 36% of its revenue on mobile devices. Revenue from Tablets, which was earlier clubbed with desktop revenue is being added to mobile revenue starting this quarter. Based on the new classification, mobile revenue in Q2 2014 was 33% and has risen 3% sequentially.

Mobile traffic accounted for over 50% of Baidu’s search traffic during the quarter. While this could hurt revenue growth in the short term due to the lower monetization rates typically seen on mobile devices, the trend is a positive for Baidu in the long term.

Baidu Mobile Maps saw good traction in user growth clocking 240 million Monthly Active Users (MAUs), up 20% sequentially, from 200 million during Q2 2014. Baidu also made significant progress in app distribution, distributing 160 million apps (daily average) vs 130 million a quarter ago.

Baidu Profitability Analysis

In Q3 2014, Baidu reported an operating profit of RMB 3.92 billion ($638.6 million) and a net profit of RMB 3.876 ($631.5 million). The company registered operating and net profit margins of 29% and 28.7% respectively.

Promotional spending for mobile products resulted in higher SG&A expenditure. That along with higher content costs and TAC kept margins at lower levels when compared to Baidu’s track record. That said, profitability showed an improvement compared with levels seen in FY 2014 so far.

Baidu generated a healthy operating cash flow of RMB 4.9 billion ($798 million) or nearly 1.3X the net income.

Baidu Q4 2014 Revenue Guidance

Baidu issued a revenue guidance of RMB 13.85 billion to RMB 14.25 billion, translating to a YoY growth of 45.4% to 49.6%.

Baidu’s revenue guidance implies a decline in growth rates when compared to the LTM average of 55% YoY growth. However, a growth of 47.5% YoY (midpoint of the guidance) is still very healthy. Further, the projected growth rate is still much higher than it was in parts of 2013 when YoY growth slipped (by Baidu’s standards) to as low as 39% YoY.

Baidu’s revenue guidance for Q4 2014 implies a full year revenue of RMB 48.9 billion ($7.96 billion) to RMB 49.3 billion ($8.02 billion), representing a 52.9% to 54.2% YoY growth over FY 2013 revenue.

Baidu Valuations

Baidu currently trades at $224.5 a share. Baidu’s current valuations are as follows:

  • Baidu PE ratio – 38.7
  • Baidu Price to Sales ratio – 11.1

Over the last year Baidu has been trading at an average PE ratio and Price to Sales ratio of 35.5 and 11.6 respectively. Over the last couple of years, Baidu’s net profit margins have slipped in Q4 relative to the rest of the year. Assuming a lower net margin for Q4 than was seen in Q3, and based on its implied full year revenue guidance, and average PE - PS levels over the last year, Baidu’s valuations show an upside potential.

Based on the factors mentioned above, our Baidu valuations indicate a potential upside of about 7% with a target price of $240 a share by early next year, post the Q4 2014 earnings announcements. However, if valued solely on the basis of the average Price to Sales multiples it has commanded over the last year, Baidu could be trading at about $260 a share, representing an upside potential of 15%, within the same time frame. Based on our Baidu stock analysis we assign the stock a buy rating.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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