- Baidu reported disappointing Q1’15 results with light guidance that sent the stock 7 percent downhill.
- The company positioned itself as a follower with little innovation, which is reflected in the decreasing margins.
- In the long term, the company will experience further pain before its transformation process is done.
The Chinese tech giant Baidu (BIDU) reported its earnings results for Q1’15 at the end of April with lower-than-expected revenues and soft guidance. Baidu’s stock reacted quickly and lost 7 percent of its value, completing a 24 percent plunge in the stock price since hitting all-time highs of $249 last November. Baidu’s stock is in a downtrend since the November peak, and the company tried to prevent an additional decrease by highlighting both on its press release and the earnings call that mobile revenues generated 50 percent of the company’s total revenues, up 8 percentage points from Q1’14. On its own, that figure seems impressive, and if you think of all the ambitious projects Baidu has in its pipe-like autonomous cars, artificial intelligent computers, online to offline services and global expansion, it may seem like the company is on the right track with a growth boom.
However, when looking at Baidu’s margins trend in the last three years, it unveils a disturbing picture of continuous decline, as shown in chart 1 below. The gross margin decreased 13 percentage points between Q112 and Q115, the operating margin declined 32 percentage points, and the net profit margin dropped 28 percentage points in this three-year period.
If that weren’t enough trouble for Baidu, the company is now facing a corruption scandal because an internal memo was leaked to Reuters explaining that the company had fired eight senior executives in the sales and marketing department. The legal authorities started a criminal investigation into this matter. The criminal investigation could damage the Baidu brand and uncover more cases of corruption in that will require thorough internal investigation to ensure this will not happen again and will not impact the company’s execution.
The biggest problem for Baidu is that it positioned itself as a leader in China but as a follower worldwide. Baidu follows Google’s footsteps in almost every initiative, from the feel and look of its website to the autonomous cars initiative it launched with BMW, wearable OS, and a YouTube-like video site with Xiaomi. Since Baidu positioned itself as a passive follower in the global tech market and mainly responded to Google’s actions, it is not a surprise to me that the company presents declining financials. Baidu is not only lagging behind Google in the global market; it is also falling behind the local Internet leaders like Tencent and Alibaba (BABA) that succeeded in spotting the hottest Internet trends, such as electronic payments and P2P lending.
Even though it seems that Baidu’s future is gloomy and technical analysts show that the company’s stock is heading south, the company is in the middle of a change, transforming from a Chinese Internet and search company to a worldwide tech giant. As it seems now, this change will take time. Baidu is trying to invest further in big data, deep learning, and artificial intelligence, and even though it will hardly generate any income in the near future, it is a step in the right direction. With the rise of Chinese consumer electronics vendors like Xiaomi, Lenovo, OnePlusOne, etc., Baidu should leverage its unique positioning in the Chinese market and partner with these successful hardware providers on joint solutions. For example, Baidu could partner with Xiaomi to change its operating system from Xiaomi-Android-based MIUI to a Baidu-based operating system. Also, Baidu could partner with these leading Chinese vendors to distribute advanced professional applications tailor-made for their devices that use Baidu’s superior computing capabilities, similar to the IBM-Apple deal.
Baidu has tremendous potential, and it seems that it is trying to figure out how to unlock it successfully. In the meantime, its current passive-follower tactics have failed, and the company’s growth decreases every quarter are pulling its stock price down. In my opinion, the company should focus on innovation, spot the next big things in the Internet market, and take more risks with new initiatives as other global tech companies like Google, Yahoo (YHOO), Amazon (AMZN), and Microsoft (MSFT) often make. For now, Baidu is a risky investment. Because the company is having such a difficult time lately, it might push itself to accelerate the transformation process and push for some serious changes. Investors should keep a close eye on Baidu’s stock and add it to their watchlist.
You can see Amigobulls' Baidu stock analysis video for a quick roundup of key fundamentals following the latest quarter.
Disclosure: The information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.