Baidu Stock Has More Upside Post Healthy Q4 Earnings Beat

  • Baidu has reported healthy Q4 2015 results that beat top and bottom line projections by analysts.
  • In particular, Baidu's profits showed robust growth due to good cost discipline by the company.
  • Baidu stock can continue making good gains if the company can maintain this kind of cost discipline.

Shares of giant Chinese search company Baidu (NASDAQ:BIDU) were up 12% in after-market trading after the company delivered Q4 2015 results that beat top and bottom line estimates by analysts. Baidu reported fourth quarter revenue of RMB 18.7B ($2.89B) good for 33.1% Y/Y growth and RMB 150M better than Wall Street consensus. Net income jumped 663% Y/Y to RMB24.712 billion ($3.815 billion) translating to diluted earnings per ADS of RMB 70.92 ($10.95).

Baidu’s revenue per ad customer increased 9.5% Q/Q and 17.4% Y/Y to $4,768. That was quite an improvement compared to Q3 when Y/Y growth checked in at 9.3%. Baidu’s online ad customers totaled 555k, up 6.1% Y/Y but down 10.9% Q/Q partly due to seasonality. Baidu Wallet accounts increased 189% to 53M.

Baidu’s O2O, or online-to-offline, GMV was up 397% to $2.3B. Baidu’s heavy investment in O2O ventures including iQiyi, Baidu Nuomi, and Baidu Takeout Delivery have been taking a heavy toll on its bottom line leading investors to call for the company to sell or divest at least some of these businesses. Baidu appears to be heeding those calls. The company recently received a buyout offer for iQiyi, a video streaming website, for $2.8B, and could announce an impending sale during its upcoming earnings conference call.

It was Baidu’s subdued spending growth, however, that allowed the company to post robust bottom line growth. Baidu’s major line items all grew considerably slower than the top line, which is very encouraging. SG&A spending was up 28.5% Y/Y to $699M after expanding 111.2% during the third quarter due to heavy promotional spending. R&D spend was up 16.4% Y/Y to $383.9M, considerably slower than 46.9% growth during Q3 2015.

Baidu’s smaller ticket items, however, showed a negative trend by growing faster than revenue. Traffic acquisition costs, or TAC, continued growing and represented 14% ($403.9M) of revenue compared to 13.4% a year ago. Operational costs also increased to $182.4M, or 6.3% of revenue compared to 4.4% during the previous year’s comparable quarter while content costs (online video-driven) jumped to $213.3M, or 7.4% from 4.2% during Q4 2014.

Baidu proceeded to issue light guidance, though the market seemed unfazed probably because the company has a history of under-promising and over-delivering. Baidu said that it expects Q1 revenue of RMB15.41B-RMB15.97B ($2.379B-$2.465B) vs. RMB16.32B ($2.5B) consensus.

Cost Discipline Can Ease O2O Investment Worries

Overall, this was a pretty solid report by Baidu. The most important takeaway was that the company had finally managed to rein in on its ballooning costs, particularly for bigger line items that have for long been a drag on profitability. It’s this kind of cost discipline that investors have been demanding from Baidu, and this report could become instrumental in helping Baidu's battered shares. Baidu stock is down 16.3% YTD and 22.3% over the past 12 months.
BIDU stock chart

Baidu stock price vs NASDAQ by amigobulls.com

The current market seems to be favorable to Chinese stocks, and many have been recovering after the PBOC recently started mopping up excess cash from Chinese markets, signaling the passing of worries about a possible cash crunch. Meanwhile, the yuan recently made its strongest one-day gain after appreciating 1.3% against the dollar. Healthy new loans data has also been helping.

Investors will be listening intently to Baidu’s next conference call to see whether the company will announce the divestiture and /or sale of its profit-dragging O2O ventures. Any positive announcement in this direction will likely trigger another rally in the share price. But even if Baidu decides not to divest or sell some of its O2O ventures, the shares can continue making healthy gains if the company can maintain the kind of cost discipline it displayed during the fourth quarter. Baidu shares, therefore, remain a good long-term investment.

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