- Baidu’s revenue growth and profitability is robust and comparatively the best among peers.
- Profit margins have reduced over recent quarters and could remain subdued in the coming quarters.
- Baidu is attractive at current valuations for long term investment.
Chinese search major Baidu (NASDAQ:BIDU) will report Q1 2014 earnings on 24 April 2014. The first half of 2014 will be a challenging period for Baidu as it contends with China’s weakest economic phase in recent times. How the company emerges from Q1 could set the tone for investor expectations for the rest of the year.
Baidu's Q1 2014 Guidance
Baidu’s revenue growth guidance for Q1 2014 ranges between 54.8 – 59.5% representing a potentially strong quarter if the guidance is met.
Baidu’s Robust Financial Track Record
Baidu has an impeccable track record when it comes to revenue growth and profitability. Over a 3 year period, Baidu has averaged revenue growth of about 60% with operating profit margins and net profit margins averaging about 46% and 42% respectively.
In Q4 2013, Baidu’s revenue grew by over 50% to reach $1.55 billion with net profit margins of 29%, beating estimates on both fronts. The key highlight on the growth front is that 20% of Baidu’s revenue came from mobile vs 10% two quarters ago, reflecting the success of its aggressive spends to achieve the same.
Baidu’s profit margins have declined in the last one year. However, the decline has come on the back of its aggressive reinvestment targeted at future growth.
In Q4 2013, selling, general and administrative expenses (SG&A) increased by 135% largely due to promotional spends on mobile products. The company also saw higher bandwidth costs while its acquisition ‘iqiyi’ drove up content costs. The company also saw an increase in hiring and encountered higher ‘traffic acquisition costs’ or TAC.
That said, our previous article highlights the fact that Baidu still has the best revenue growth and profitability, and that too by a fair margin, among its peers like Google and Yandex.
Baidu: Future Outlook
In the coming quarters, profit margins will not be the key focus of the company’s management, and so, a rebound in margins will be surprising.
In FY 2014, Baidu is expected to invest aggressively in key areas like mobile platforms. To start with, in Q1, it will spend on sales & marketing to drive mobile app installations. Among those is an app that enables users to check train ticket availability and complete bookings.
An increase in Traffic Acquisition Cost is expected, especially with the company keenness to leverage its ad-network to promote products. The company has also indicated a potential increase in tax rates and further investments in infrastructure and content.
Further, Baidu has explicitly stated intent to diversify and invest into non-search businesses, so broadly, profit margins are likely to remain subdued (by Baidu’s own high standards).
Potential Drivers of Baidu’s Future Growth
Baidu’s mobile thrust has started with upgrading to a search app that’s 60% faster. Further, it has acquired ‘91 Wireless’ to boost its presence in mobile app and game distribution, mobile advertising, payment app platforms and cloud storage. Baidu is also biting into the mobile security pie with its widely promoted app ‘Baidu Mobile Guardian’.
Baidu is leveraging its popular maps application to deepen its location-based-services (LBS). The integration of its group buying platform ‘Nuomi’ saw LBS transactions jump 60% in Q4 vs Q3. Baidu has now bought out ‘Nuomi’ completely to drive its e-commerce and LBS ambitions.
Baidu’s 55% stake in Chinese travel and e-commerce business Qunar gives it access to China’s online travel industry which is growing at 22% annually. Further, apart from buying iQiyi, China’s biggest online video site by unique mobile users, Baidu is dabbling in fashion retail and hardware like cloud enabled security cameras, a wireless music player, a pair of routers and a Chromecast clone under the brand Xiaodu.
Potentially the biggest of Baidu’s many ventures is its foray into cloud services. Baidu’s recently launched website Dulife serves as a platform for smart wearable device manufacturers to showcase and market their products. These devices collect ranging from the user’s blood pressure to sleep patterns, calories burned, movement and location. This data will be stored on Baidu’s cloud for future use making it a gold mine for the company.
Further, Baidu's recently launched mobile payment service 'Baidu Wallet' will be a worthy addition to its repertoire in the quarters following Q1.
At its current price of $158, Baidu has fallen by over 16% from its 52 week high less than 2 months ago. Baidu currently trades at a higher Price / Earnings and Price / Sales mutiples when compared to its peers. However, it is far ahead of them in terms of revenue growth and profitability making it an attractive long term investment at current valuations.
|Price/Earnings ratio (P/E)||29.4||23.7||31.6|
|Price/Sales ratio (P/S)||6.3||8.0||10.7|
|Return on Equity (ROE)||16%||32%||31%|
|Return on Invested Capital (ROIC)||41%||54%||115%|
To see Baidu’s current stock price, please click here: (NASDAQ:BIDU)