Baidu (NASDAQ:BIDU), the Chinese search engine giant reported its Q4 2013 results on Feb 26th after market close. Solid topline growth and huge margins are two factors which have always been associated with this internet giant from China. Q4 2013 was no different as Baidu Inc. reported solid topline growth of 50.3% Y/Y and Net Income margin of 29%, beating analyst estimates on revenue as well as bottom line. The strong quarterly performance of Baidu Inc. was no surprise for us at Amigobulls and we continue to remain bullish on Baidu heading into 2014. We believe that the firm will outgrow its current valuations as the investments into new areas begin to pay off in the coming quarters.
We now look into the company's Q4 2013 performance, our expectations on where we think the stock is headed over the coming quarters.
Baidu Q4 2013: solid topline growth
The company reported a topline growth of 50.3% Y/Y. However the EPS did decline, making it the fourth straight quarter of EPS growth trailing the topline growth significantly. The chart below displays the company's Y/Y revenue and earnings growth in the four quarters of 2013.
While topline growth at Baidu is a fact as broad as daylight, the slowdown in earnings growth is a concern at first glance, blurring the Baidu bull case to that extent. However, the earnings growth presented in the above chart was negatively impacted by heavy reinvestment into the business, particularly in the mobile platform. The concern is minimized when you consider that Baidu just reported a Net Income margin of 30% in the latest quarter, a rarity amongst its internet peers.
'Reinvestment must lead to growth', is what rationality dictates. Well the uptick in revenue growth in the second half of 2013 is noteworthy and encouraging, which we believe was driven by growth in the mobile platform with mobile revenue contributing to 20% of total revenues in Q4 2013.
The investments into the mobile platform as well as improving the core search product have negatively impacted profit margins in 2013. The chart below displays the profit margins over the last eight quarters.
The Y/Y dip in margins is pretty evident from the above chart. Nevertheless, with an adjusted EBITDA margin hovering close to 40%, profits aren't at a risk of extinction at Baidu Inc. We strongly believe that the strategic investments into newer areas and products, apart from continued focus on improving their search offerings will continue to generate solid growth in earnings over the long term.
Cash isn't a worry at the 'Google of China' with Q4 cash flow from operations healthy at $677 million. The company exited the quarter with a strong balance sheet reflected in the year end cash balance of $6.34 billion, which is adequate to sustain the current investment drive at the firm.
Analyst estimates v/s actual performance
Baidu reported revenue and earnings numbers, which convincingly beat analyst expectations for Q4. According to Streetinsider.com, the analyst consensus estimate for Baidu was an EPS of $1.37 on revenue of $1.53 billion. The company reported an EPS of $1.39 on revenue of $1.57 billion, implying an earnings surprise of 1.5% and a revenue beat of 2.6%. The quarter was the seventh earnings surprise reported by Baidu Inc. in the last eight quarters, a performance which is noteworthy and hard to miss.
We expect the company to see solid topline growth as mobile contribution to topline continues to rise. The company's continuous focus on the mobile platform will be a key growth driver in the fastest growing smartphone market in the world. Baidu's investments into consumer products including gaming, music and online literature is something which we will be keenly tracking, given the increasing number of users migrating to the smartphone or tablet platform. Our latest analysis gives Baidu stock a rating of 3.1/5, a score negatively impacted by the falling profit margins in 2013. However, the company’s margins continue to remain healthy at the current levels strengthening our bullish outlook on this Chinese search behemoth.
To see Baidu’s current stock price, please click here: (NASDAQ:BIDU)