- Baidu missed analyst estimates of revenue and EPS.
- Baidu's revenue guidance was lower than expected.
- Baidu's growing presence on mobile could drag short term revenue growth.
- Baidu's strength on mobile is positive in the long term.
- Baidu valuations indicate upside potential.
Baidu (NASDAQ:BIDU) reported its earnings for Q4 2014 on 11 Feb 2015. The Chinese search giant missed analyst estimates of revenue and EPS for the quarter, sending its stock price lower in after-hours trading. Baidu’s revenue guidance for Q1 2015 was also lower than expected. However, the lower revenue growth trajectory in recent times is attributable in part to Baidu’s progress on mobile devices. Baidu’s growing share of revenue on mobile could drive future growth.
Baidu Earnings Q4 2014
Baidu missed revenue estimates marginally while missing EPS estimates by a bigger margin in Q4 2014. That said, Baidu’s revenue growth matched its own guidance, coming in at the midpoint of its Q4 revenue guidance.
|Baidu Q4 2014 Earnings||Analyst Estimates||Actuals||Miss|
|Baidu Revenue (RMB billion)||14.16||14.05||-0.8%|
|Baidu EPS RMB||9.91||9.01||-9.1%|
|Baidu Revenue (USD billion)||2.28||2.26||-0.8%|
|Baidu EPS $||1.60||1.45||-9.1%|
Baidu Revenue Growth
Baidu revenue grew to RMB 14.05 billion or $2.26 billion, clocking a growth of 47.5% YoY. In spite of the decline in growth rates, Baidu grew at a healthy pace, in line with its guidance.
The slowdown in growth rates was partly due to the growing share of revenue the company generates on mobile devices. We will look at this in more detail in the following sections. As is usually the case, the company earned almost all of its revenue from online advertising.
Q4 is generally a weak quarter in terms if Baidu’s profit margins. However, even compared to its Q4 margins in previous years, Baidu’s profitability declined in 2014. Baidu’s operating and net profit margins came in at 21% and 23% respectively.
Baidu’s profit margins have been on the decline over the last couple of years, partly due to its aggressive growth focused approach and spends on ramping up acquired businesses.
|Baidu Profit Margins||2011||2012||2013||2014|
|Baidu Net Profit Margins (average)||45.7%||46.8%||33.2%||27.4%|
In Q4, Baidu saw a jump in Traffic Acquisition Costs or TAC, up to 13.4% of total revenue, from 12.3% a year ago, 12.9% in Q3 2014. While Bandwidth and Depreciation costs declined, Content Costs and R&D costs rose during Q4.
Baidu’s promotional spends drove Selling, General and Administrative expenses (SG&A). Baidu’s SG&A costs spiked by 30% sequentially to touch 25% of revenue, up from 20% in Q3 2014.
Baidu Makes Great Progress On Mobile
For the quarter, 42% of Baidu’s total revenue was generated on mobile, up from 36% in Q3 2014, marking a significant jump. Baidu generated only 20% of its revenue on mobile a year ago, in Q4 2013, and has made significant progress on this front in 2014.
Search traffic on mobile surpassed PC search traffic earlier in 2014. According to the company, in Dec 2014, mobile search revenue surpassed PC search revenue, and daily mobile searches per user grew 22% YoY in Q4.
Clearly Baidu is transitioning from monetization on PC to mobile devices. This is good news for the company from a long term perspective. However, in the short term, the transition is likely to impact revenue growth, since monetization rates tend to be lower on mobile devices. However, Baidu’s revenue growth will get a boost if monetization rates on mobile start to catch up with those on PC. Baidu’s management expects to see mobile monetization rates rise through the coming year.
Baidu distributed 174 million apps a day on average in Q4, accounting for 42% of app distribution market share.
Baidu Revenue Guidance Q1 2015
Baidu expects to see a YoY growth ranging from 33.2% to 37.6% in Q1 2015, translating to a revenue of RMB 12.64 billion to RMB 13.06 billion, or USD 2.04 – 2.11 billion.
Q1 is typically a weak quarter for Baidu. However, Baidu’s revenue guidance for Q1 is visibly weak by its own standards, even for Q1. Analysts expected the search giant to deliver a revenue of RMB 13.6 billion.
Baidu’s CFO Jennifer Li explained the weak guidance as follows:
“As you know, because of the holidays, Q1 is a seasonally slow quarter. For this Q1, as compared to historical years, our guidance reflects the combined impact of, one, the late timing of Chinese New Year, and two, mobile's growing traffic contribution, which currently monetizes at a rate lower than that of PC.
Mobile monetization is on a path of steady and healthy growth. This upward trend will continue, as we progress through the year.”
At $205 a share, Baidu registered a fall of 4.5% on the day following its earnings release. At its current stock price, Baidu valuations are as follows:
- Baidu PE ratio - 35.4
- Baidu Price To Sales Ratio - 9.5
Baidu’s revenue growth could slow in the short term as it transitions from generating bulk of its revenue on PCs to mobile devices. The company’s profitability has also declined. While Baidu’s profit margins are still healthy at 2014 levels, they could continue to decline in 2015. The factors could potentially contribute to a lower multiple being assigned to Baidu in 2015.
Currently analysts estimate Baidu’s 2015 revenue to come in at RMB 69 billion or about $11.12 billion. Being conservative, even assuming that Baidu clocks a revenue of only RMB 65 billion and trades at a Price to Sales multiple of 8, Baidu valuations indicate an upside potential of about 11%. However, if Baidu’s performance remains strong post Q1, the upside potential could be greater. (See: Baidu stock analysis
Baidu Earnings Preview Q4 2014
(Published on 2 Feb 2015)
- Baidu earnings for Q4 2014 are due on 11 Feb 2015.
- Baidu is fundamentally solid despite slowing growth and lower margins.
- Baidu valuations indicate significant upside potential in 2015%.
Baidu is scheduled to report its earnings for Q4 2014 on 11 Feb 2015. Baidu’s guidance for Q4 indicates a slowdown in the rate of growth. Following Baidu earnings in Q3, the focus will also be on Baidu’s profit margins which have declined compared to earlier levels. However, in spite of the decline in growth rates and profit margins, Baidu’s numbers are still impressive. Our latest Baidu valuation indicates an upside potential for the stock in 2015.
Baidu Q4 Earnings Schedule
- Baidu Earnings Date - 11 Feb 2015
- Baidu Earnings Release - 4 PM EST
- Baidu Earnings Call - 8 PM EST
Baidu Earnings Guidance Q4 2014
Baidu’s guidance for Q4 indicates a slowdown in the revenue growth rates, when compared to those seen in 2014. However, Baidu’s growth rates are still impressive, at 47.5%, at the midpoint of Baidu’s revenue guidance.
|Baidu Q4 Guidance||Lower End||Upper End||Midpoint|
|Revenue (billion RMB)||13.85||14.25||14.05|
|Revenue (billion $)||2.216||2.28||2.25|
|YoY Growth %||45.4%||49.6%||47.5%|
Note: All currency conversions for future values are based on the exchange rate of 1 USD = 6.24 RMB. For all historical numbers, the numbers are from Baidu earnings release documents.
Baidu Earnings Analyst Estimates
Baidu’s guidance is usually quite accurate, and the company’s past performances have come in very close to its quarterly guidance. Analyst estimates of revenue for Q4 are closer, albeit lower, than the upper end of Baidu’s guidance.
Baidu Q3 2014 Earnings Recap
Baidu Revenue Growth
Baidu delivered a strong quarter in Q3, missing revenue estimates by 0.2% and beating EPS estimates by a convincing 12.5%. Baidu’s revenue grew by 52% YoY, to RMB 13.52 billion or $2.20 billion. Baidu’s growth rates have declined compared to the levels seen in 2014. However, as seen in the graph below, Baidu’s growth rates are still better than they have been in some earlier periods. Further, at close to 50% YoY, Baidu’s growth remains impressive.
In Q3, Baidu’s operating and net profit margins came in at 29% and 28.7% respectively. Baidu’s profit margins have declined compared to levels seen in the past. However, over the last 12 months, Baidu’s profit margins seem to have stabilized, hovering around the 29% mark.
In spite of the decline in margins, Baidu’s profitability remains quite enviable at its current levels. In Q3, Baidu’s cash flows continued to be strong. The search giant generated an operating cash flow of RMB 4.9 billion or $798 million, or 1.3 times its net income.
You can also watch our Baidu stock analysis video for a quick roundup of Q3 2014 financials like free cash flows, valuations and return on equity.
Mobile search traffic accounted for 50% of Baidu’s total search traffic in Q3. Baidu earned 36% of its revenue on mobile devices, up from 33% in Q2 2014. As is evident, monetization rates are lower on mobile devices. This could also be one of the reasons for the slowdown in Baidu’s growth rates.
Baidu Mobile Maps saw a 20% jump in users, ending Q3 with 240 million monthly active users. Baidu also saw a significant improvement in app distribution, distributing an average of 160 million apps daily, up from 130 million during Q2 2014. Baidu’s global expansion also took the shape of its entry into Brazil.
Baidu was one of the best performing Chinese internet stocks in 2014. Baidu’s stock price has risen by close to 23% since the beginning of 2014. However, Baidu valuations have improved over the same period in terms of its Price to Sales valuation, indicating a strong revenue performance. In terms of PE ratio, Baidu valuations have become marginally more expensive, due to the fall in profit margins.
- Baidu PE Ratio - Average since 1 Jan 2014: 36.77
- Baidu Price To Sales Ratio - Average since 1 Jan 2014: 11.40
- Baidu PE Ratio (current): 36.99
- Baidu Price To Sales Ratio (current): 10.6
Based on the average Price to Sales ratio over the last 12 months, and Baidu’s 2015 revenue estimate of RMB 69.6 billion or USD 11.14 billion, Baidu valuations indicate a strong upside potential of over 60%. However, to keep valuations on the conservative side, one would do well to value Baidu using lower multiples, given its relatively slower growth and lower profit margins in recent quarters.
Even at significantly lower Price to Sales multiples of 8 and 9, Baidu valuations indicate an upside potential of 17% to 31% with price targets of $254 to $286 a share. However, if valuations continue to remain at current levels, the potential upside could be significantly higher. Baidu is one of our top stock picks and has returned over 44% since we added it to that list. In spite of a great year in 2014, Baidu is one of the top 10 stocks for 2015.