Here’s Why Baidu’s Stock Is Surging
After seeing a significant drop during July-October, Baidu‘s (NASDAQ:BIDU) stock has surged by over 35% during the past month. A number of positive factors have played into this stock movement, including decreased concerns in the Chinese economy, the strong third quarter results, and the recent share exchange agreement with Ctrip. Baidu’s recent results indicated that the company is winning on the mobile platform, where most of the Chinese Internet usage has now shifted. Moreover, the company’s moves in the online-to-offline (O2O) and online video areas reflect promising investments that could bolster its long-term outlook. Over the coming future, we see market share concerns (from Qihoo and Sohu) and declining margins as the key challenges for Baidu, that could influence its stock price movement.
See our complete analysis of Baidu here
Here’s Why Baidu’s Stock Is Surging
Decreased Concerns Pertaining To Chinese Economy: Baidu’s stock plummeted significantly during July-October 2015, primarily owing to concerns pertaining to risks in the Chinese economy. Moreover, the sudden drop in Chinese equities in July also brought down investor sentiment during the period. However, we think these concerns have now somewhat subsided on the back of stimuli measures to revive the Chinese economy. Moreover, the Chinese equity market (as represented by Shanghai SE Composite Index) showed some stability last month, witnessing a 7% rise.
Out-Performance In Q3 Earnings: With 36.0% top-line growth, Baidu outperformed market expectations during the third quarter of 2015. While active online marketing customers rose by 20.7% annually, revenue per customer also increased by 9.3%, driving earnings growth during the quarter. We think the rise in revenue per online marketing customer is especially encouraging, since it reflects higher bargaining power and improved value proposition.
Baidu’s impressive play on the mobile platform has further helped bolster investor sentiment on the stock, considering more than 80% of Chinese Internet usage is now being driven through mobile platform. Mobile revenue comprised 54% of overall revenues during Q3 2015, as compared to 37% in the corresponding period a year ago. This is as mobile search accounted for roughly two-thirds of overall search traffic on Baidu, and as the mobile monetization rate has improved over the past few quarters.
Increased Presence In The O2O Market: Baidu is significantly investing in the fast-growing online-to-offline (O2O) business, which connects online users to merchants in areas, such as entertainment, food delivery, grocery, and ticket booking. During Q3, GMV for transaction services (which was earlier named O2O and other) grew by 119% to RMB 60.2 billion. While Nuomi GMV increased by 475% annually, Baidu Takeout Delivery GMV also rose twelve-fold. [1] Using these transaction services on products such as Maps, Nuomi and Local Express, Baidu aims to drive business for over 40 million SMEs (without websites) in China. Since Baidu is planning to spend as much as RMB 20 billion over the next three years on the O2O opportunity, we believe this business will continue to rise rapidly in the coming years. However, its effect on the margins will be dilutive in the near-term.
Deal With Ctrip: In a recent deal, Baidu entered into a share exchange transaction with Ctrip whereby it swapped its majority stake in Qunar for 25% voting interest in Ctrip. This deal comes as a positive for Baidu, in our view, as the online travel space is highly competitive and accounted for huge losses for Baidu over the past.
Our $216 price estimate for Baidu’s stock, represents near-5% upside to the current market price.
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
Notes:- Baidu (BIDU) Robin Li on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, October 30, 2015 [↩]