What Lies Ahead For Baidu After A Strong Quarter

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Baidu (NASDAQ:BIDU) announced its Q3 2017 earnings on October 26, reporting a 29% year-over-year increase in net revenues to RMB 23.5 billion ($3.5 billion). Strong revenue growth was complemented by a significant improvement in the company’s operating income, as shown below.

Strong Operating Metrics Help Drive Earnings

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Baidu has witnessed strong growth in its online video streaming platform iQiyi over the the last few years. At the end of the previous quarter, Netflix and Baidu signed an agreement which would allow Netflix to stream some of its programs in China pending regulatory approval. This could further fuel revenue growth in Baidu’s online video business. This resulted in strong traction for iQiyi’s content. During the quarter, iQiyi released a reality show that generated over 2.7 billion views. Additionally, the total number of PC and mobile daily active users reached record levels of 78 million and 160 million, respectively.

However, strong revenue growth in these segments has been complemented by high cost of revenues and operating expenditures in these businesses. Baidu has made significant expenditures for content acquisition and bandwidth costs for the video business, traffic acquisition for transaction services, as well as marketing and promotions. As a result, Baidu has operated its streaming video and transaction services businesses at a loss over the past few years.

Baidu’s total cost of revenues remained high during the quarter at RMB 18.8 billion, which was over 21% higher than the prior year period. Within cost of revenues, Baidu successfully reduced traffic acquisition costs from RMB 2.6 billion in Q3’16 to under RMB 2.5 billion in Q3’17. Moreover, the company limited the growth in SG&A expenses, as shown below. SG&A expenses were lower due to a decrease in promotional spending by the company. On the other hand, the company increased its expenditure on acquiring content by 76% to RMB 3.9 billion.

Guidance And Long-Term Outlook

Baidu’s management expects its Q4 revenues to be over 25% higher on a year-over-year basis. Strong growth is expected from the core business as well as smaller revenue streams including iQiyi and transaction services.

For the full year, we forecast the company to register around 20% growth in revenues driven by a strong performance from its non-core businesses, including iQiyi and transaction services. In addition, the company expects to continue to invest in R&D for potential growth areas such as mobile and AI-related ventures. On the other hand, we expect Baidu to continue to improve its operating efficiency by limited growth in SG&A expenses, which should help the company report healthier margins.

Our $184 price estimate for Baidu is around 20% below the current market price.

See our complete analysis for Baidu

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