A Closer Look At Baidu’s Strong Performance This Year

Like most large internet companies, Baidu (NASDAQ:BIDU) has had a solid year thus far, with strong revenue growth and healthier margins. Baidu’s core search and transaction services businesses have grown considerably this year, complemented by robust growth at online video streaming business iQiyi. Accordingly, Baidu’s stock price has surged from $160 at the beginning of the year to around $240 currently.

As shown in the table below, Baidu reported 17% growth in revenues to RMB 61.3 billion ($9.3 billion) in 2017 so far. Strong revenue growth was complemented by a massive 38% improvement in the company’s adjusted EBITDA to RMB 16.5 billion, with adjusted EBITDA margins expanding by over 4 percentage points. The resulting net income was up considerably due to the company selling off its food delivery business during the year. Correspondingly, net income and diluted earnings per share nearly doubled to RMB 17 billion ($2.6 billion) and RMB 49 ($7.25), respectively.

Key Growth Drivers

Baidu has witnessed strong adoption of its new technology among users this year, particularly Mobile Baidu 9.0 which launched mid-year. The refreshed flagship app focuses on enhancing user experience through faster loading and easier navigation, making it more like a mobile native app with “query-less” searches. The new app also has voice recognition searches making it even easier for first time users to navigate. Correspondingly, the total daily active users (DAUs) on Mobile Baidu surpassed 100 million in May this year, from around 80 million in previous months.

Similarly, iQiyi had a strong year, with the total number of DAUs on mobile app reaching 160 million by the end of Q3, up from 125 million at the end of last year. During the year, 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.  We forecast Baidu’s share in the Chinese online video streaming market to remain comfortably above 20% through the end of our forecast period.

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.

This trend somewhat reversed this year, with the company reporting a limited increase in traffic acquisition and bandwidth costs, as shown below. Baidu successfully reduced traffic acquisition costs from RMB 7.7 billion in the first three quarters of 2016 to RMB 7.1 billion this year. Moreover, bandwidth and other costs were up by around 18-19%, while the company limited the growth in SG&A expenses by decreasing promotional spending through the year.

Baidu’s total cost of revenues remained high during the year at RMB 31.6 billion, which was over 24% higher than the prior year period. Within cost of revenues, Baidu made large expenditures to acquire premium copyrighted movies and television shows. The company has also produced original content exclusive to its platforms and affiliated third party platforms. As a result, content acquisition has become the largest individual cost this year, up 82% on a y-o-y to RMB 9.6 billion. Netflix and Amazon Video are following a similar strategy in their respective markets to boost the volume and quality of content on offer, anticipating future growth.

Growth Spree to Continue Through the End of the Year

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. Disciplined expense management has led the company’s margins to expand through the year – a trend expected to continue in future quarters as well.

Baidu’s R&D expenses are expected to remain high since the company expects to continue to invest in areas for future growth such as mobile and AI-related ventures. On the other hand, we expect Baidu to continue to improve its operating efficiency by limiting growth in SG&A expenses, which should help the company report healthier margins. We forecast Baidu’s full year adjusted EBITDA margin to be 3 percentage points higher than 2016 levels at around 20%.

Our $195 price estimate for Baidu is around 20% below the current market price. You can modify the interactive charts in this note to gauge how a change in individual drivers can have on our price estimate for Baidu.

See our complete analysis for Baidu

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research