Weak Q3 Outlook Sends Baidu’s Shares Lower
Baidu (NASDAQ:BIDU), the leading Chinese search engine giant, posted annual revenue growth of 38.3% to RMB 16.575 billion in the second quarter of 2015, which came in line with consensus market estimates. However, its stock fell in after-hours trading, owing to the disappointing outlook for the third quarter. Specifically, the company guided to slower revenue growth (34.4% to 37.4% increase) in Q3 2015, along with a drastic increase in its investments to tap opportunities in the growing O2O (online-to-offline) e-commerce market. Notwithstanding these near-term challenges, we see a strong long-term outlook for Baidu in the coming years, owing to increased monetization on the mobile platform and solid growth opportunities in the e-commerce segment. Baidu continues to enhance its dominant share on the mobile platform with several products and services, and this could help fuel its top-line growth in the coming years, in our view. [1]
See our complete analysis of Baidu here
Search Business Drove Baidu’s Earnings In The Second Quarter
Baidu’s core search business showed robust growth during the second quarter of 2015; this drove the online marketing revenue to rise by 37.1% annually during the period. While the number of active online marketing customers increased by 20.9% year over year, revenue per online marketing customer also rose by 13.2% annually in Q2 2015. The company’s profits in the quarter were supported by healthy margins in the search business (over 50%), as the other businesses including O2O & Other and iQiyi caused the operating margin to decline by 25.3 and 5.1 percentage points, respectively. [2]
Mobile Business Continues To Show Healthy Gains
The company showed strong performance on the mobile platform during Q2 — the number of active monthly users (on mobile search) reached close to 630 million, as compared to 600 million in the prior quarter. In addition, its daily active users crossed 100 million for the first time in the second quarter. While the monetization rate on both mobile and PC devices increased for Baidu in the second quarter, we expect the monetization rates on mobile devices to move closer to desktop levels in the coming years. This will be driven by leveraging location-rich data in mobile search results. Hence, the share of mobile in overall revenues could increase significantly from the 50% level recorded in Q2 2015, in our view.
O2O E-Commerce Initiatives
O2O E-Commerce Initiatives To Power The Next Chapter Of Growth At Baidu; However, Expect Investments To Rise Drastically In This Area In The Coming Quarters
Baidu aims to drive the next chapter of its growth away from its search business to O2O e-commerce initiatives.These connect users to merchant services such as online travel, ticket booking, entertainment, food delivery, as well as grocery and other services. The company’s management believes these services to be a RMB 10 trillion market opportunity.
For the first time, the company divulged the financial details for the O2O and other services (which includes Qunar, Baidu Nuomi, Baidu Takeout Delivery, and other products) — their GMV was seen at RMB 40.5 billion (109% annual rise) during the second quarter. While these services could accelerate the top-line growth at Baidu, they are also expected to be dilutive to overall margins in the near-term. This is as the company intends to invest as much as RMB 20 billion over the next three years to expand its share in this market.
We are in the process of revising our $213 price estimate for Baidu’s stock.
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Notes:- Baidu Announces Second Quarter 2015 Results, Baidu Investor Relations, July 27, 2015 [↩]
- Baidu (BIDU) Robin Li on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, July 28, 2015 [↩]