Baidu (NASDAQ:BIDU), the leading online search provider in China, is scheduled to report its Q3 2013 results on October 29, 2013. Its stock price has appreciated by around 40% since the last quarterly results were declared. Investors were encouraged by the rising monetization on mobile devices, which accounted for over 10% of the company’s revenue in Q2 2013. Additionally, the market has been upbeat on the recent investments made by Baidu in companies such as Nuomi and 91 Wireless which extended its reach in the rapidly evolving Chinese mobile Internet space. Further, investments made by Baidu in the online video vertical has also added to the positive momentum in the company’s stock price.
Third quarter results will be keenly tracked by investors, and any positive or negative surprise could lead to a significant movement in its stock price. We expect the company to post strong revenue growth during the quarter, however, the profitability pressure is expected to remain.
Recap of Q2 2013 results
Baidu posted revenue growth of 38.6% annually in Q2 2013 to $1.23 billion, which was better than market expectations. Revenue growth in the third quarter was forecast between 39.7% to 43.3% by the company’s management, and if the company is able to perform above this guidance, the company’s stock price could rise significantly.
The company’s operating margin dipped from 51.6% in Q2 2012 to 38.4% in Q2 2013, due to 83.5% and 72.6% rise in SG&A and R&D expenses, respectively. Investments in its mobile platform development, increased infrastructure capacity and consolidation of the online video platform contributed to the increase in costs.
Profitability outlook for the third quarter
We believe the margins could stay under pressure in Q3 2013 as Baidu continues to invest in infrastructure and mobile strategy. We believe the company is taking the right steps by investing in these strategies, on account of rising competition in the search engine market and increased usage of mobile Internet in China.
Rising competition in the Chinese online search engine market
Increasing competition in the Chinese Internet search engine market is a factor that has played a key role in influencing Baidu’s stock price movement in 2013. Enjoying dominance over the Chinese online search market, Baidu is facing increasing competition from Qihoo 360 and Sogou. According to analysts at T.H. Capital, Qihoo’s market share could have risen to 17.5% by August 24, 2013, as compared to 15.8% at June 30, 2013.  We are keen to see how the rising market share at Qihoo is affecting the growth at Baidu in the earnings results.
Mobile platform development represents a key strategy for Baidu
While the Chinese Internet market is seeing a trend towards greater mobile usage, this represents certain challenges for Baidu as it has a low market share on mobile devices (37.5%), as compared to desktops (more than 70%). 
Baidu is focusing its R&D and marketing efforts to increase its popularity in the Chinese mobile Internet market. Its recent strategic investments in Nuomi and 91 Wireless Websoft strengthened the company’s position in the mobile market. We are keen to track how these investments are mapping to rising mobile monetization at Baidu in the earnings call.
We will update our $128 price estimate for Baidu’s stock after the earnings release.Notes:
- Qihoo Gained More Search Market Share, But It’s OK Because Baidu Moved Onto Mobile, Barron’s, September 5, 2013 [↩]
- China’s Baidu reports weaker profit growth in Q1, PCWorld, April 25, 2013 [↩]