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Is It Finally Safe to Buy Baidu Stock?

Baidu's (NASDAQ: BIDU) stock recently jumped after the Chinese search leader unexpectedly hiked its fourth-quarter guidance amid China's economic slowdown and the ongoing coronavirus outbreak.

The company raised the midpoint of its fourth-quarter revenue guidance from 2.6% growth to 5.1% growth, and it lifted its revenue forecast for Baidu Core (which excludes its share of video streaming platform iQiyi (NASDAQ: IQ) and other non-core businesses) from 0%-6% growth to 4%-6% growth.

Baidu also expects the midpoint of its non-GAAP net income (i.e., measured without relying on generally accepted accounting principles) to nearly double as Baidu Core's non-GAAP earnings rise 50% to 55%. Analysts had anticipated just 16% earnings growth.

These rosy numbers suggest that the worst might be over for Baidu, which shed over 25% of its market value over the past 12 months as its core advertising business lost momentum. So is it finally safe to buy shares of this beaten-down stock?

Image source: Getty Images.

Tracking Baidu's decline

Baidu's core advertising business generated 73% of its revenue in the third quarter. It lost momentum over the past year, due to the economic slowdown in China and intense competition from rivals like Tencent (OTC: TCEHY) and ByteDance, which overtook Baidu in digital ad revenue last year.

Year-over-year growth

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Online marketing revenue

18%

10%

3%

(9%)

(9%)

Source: Baidu quarterly reports.

Baidu's traffic acquisition costs (TAC) held steady at less than 16% of its ad revenue last quarter, but that tepid spending suggested that it wasn't aggressively countering its rivals as China's economy grew at its slowest rate in three decades.

Instead, Baidu relied heavily on the growth of iQiyi to offset its declining ad revenue. That strategy was a double-edged sword -- it boosted Baidu's revenue, but the unprofitable video platform also sapped its earnings growth:

Year-over-year growth

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Total revenue

27%

22%

15%

1%

0%

Non-GAAP net income

47%

(17%)

(80%)

(53%)

(35%)

Source: Baidu quarterly reports.

Baidu exacerbated that pressure by investing in the expansion of its ecosystem with its DuerOS virtual assistant, Xiaodu smart speakers, driverless cars, and other next-gen technologies to expand beyond PCs and mobile devices.

All those factors caused Baidu's stock to tumble over the past year, as unresolved issues like the trade war, the economic slowdown, and the coronavirus spooked the bulls. However, Baidu's fourth-quarter guidance strongly suggests that its declines are finally bottoming out.

Tracking Baidu's recovery

As analysts fretted over Baidu's tumbling revenue and profits, the tech giant planted its seeds for future growth. It divested non-core businesses (including its investments in financial technology, meal delivery, and online travel) and invested more cash into the expansion of mini programs on its mobile app, its smart-speaker business, its AI services, its Haokan short-video app, DuerOS, and its Apollo platform for driverless cars.

The addition of mini programs to Baidu's mobile app, which allowed users to access e-commerce, delivery, ride-hailing, and other services without leaving the app, counters Tencent's (OTC: TCEHY) addition of mini programs to WeChat, the top mobile messaging app in China, over the past three years.

Last quarter, Baidu noted that the total number of daily active users (DAUs) on its mobile app grew 25% annually to 189 million in September, as monthly active users (MAUs) for the app's mini programs jumped 157% to 290 million.

Baidu also overtook Alibaba (NYSE: BABA) as the country's top smart-speaker maker last year. Last quarter, it noted that monthly voice queries on its voice assistant DuerOS more than quadrupled annually to 4.2 billion. Voice queries on Baidu Maps also doubled.

Baidu's driverless unit also secured 150 autonomous driving licenses across Chinese cities and launched its first robotaxi fleet in Changsha, Hunan. It also recently dealt Alphabet's Google a significant blow when its ERNIE AI model beat Google's BERT AI model in a natural-language-processing competition.

Baidu's expansion of its ecosystem hasn't generated significant revenue yet, but it ensures its long-term survival as online searches move beyond PCs and phones while widening its moat against Tencent, Alibaba, ByteDance, and other tech rivals.

What does Baidu's forecast tell investors?

Baidu didn't highlight any clear catalysts in its revised fourth-quarter guidance. Instead, it noted that it would delay its full fourth-quarter report till Feb. 27 to account for the impact of the coronavirus outbreak.

However, Baidu's guidance suggests that its advertising business is rebounding from a tough 2019, iQiyi's profitability could be improving, and its mini programs and DuerOS are locking in more users. Those improvements could silence the bears, who consider Baidu an also-ran in China's evolving tech sector.

Analysts expect Baidu's revenue and earnings to grow 11% and 27%, respectively, next year -- but those estimates could be raised after Baidu reveals its full report. Either way, Baidu's stock is historically cheap at 18 times forward earnings, so investors should consider buying some shares before the coronavirus fears fade.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of Baidu and Tencent Holdings. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Baidu, and Tencent Holdings. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy.


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