3 Things to Watch When Baidu Inc. Reports Earnings

By Markets Fool.com

Image Source: Baidu

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It's been a volatile ride for Baidu so far in 2016. By early February, shares of China's leading search engine had fallen more than 20%, as fears regarding China's slowing economy peaked.

BIDU data by YCharts

As global stock markets have rebounded off their lows in recent weeks, Baidu's shares have recovered some of their losses. Yet the volatility is likely to continue when Baidu reports its fourth-quarter results on Thursday after the market closes. Here are some key items to watch for that will likely determine whether that volatility tilts to the upside or downside.

2016 revenue outlook
In its third-quarter earningspress release, Baidu's management issued Q4 revenue guidance in the range of $2.864 billion to $$2.950 billion, which would represent a 29.5% to 33.4% year-over-year increase.Investors will want to see revenues near the top end of that range.

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But shareholders will be even more eager to hear management's sales outlook for 2016. If Baidu indicates that its torrid pace of revenue growth can continue in the year ahead, investors will likely rejoice. A substantial deceleration from the 30% growth range, however, may be met with selling.

Margin stabilization
Investors' patience with Baidu's money-losing ancillary businesses is beginning to wear thin. The company's strategy to diversify into high-growth, lower-margin businesses such as streaming video, app marketplaces, and group-buying websites has helped to boost revenue growth, but has taken a toll on profitability. Sophisticated investors know that it's ultimately profits that help to determinea business's long-term value, and shareholders will be looking for evidence that Baidu's heavy growth investments are beginning to bear fruit.

Baidu shareholders will likely have to suffer through at least one more quarter of declining margins and profits: It's earnings are expected to decline by more than 20% in the fourth quarter. But long-term investors will be more focused on management's comments regarding any possible margin improvements -- and a corresponding return to earnings growth -- in 2016.

Divestiture announcements
One way that Baidu can rapidly improve its profit margins is by selling off some of its money-losing businesses. Rumors that the company was considering doing just that began to intensify in January, and just weeks ago the company announced that it had received a buyout offer for its iQiyivideo streaming site.

Investors will be listening intently during Baidu's conference call for updates regarding this situation, as well as any comments by management that help to shed light on the company's future asset monetization plans.

How to access Baidu's results
Investors can tune in to Baidu's live conference call, where management will discuss the quarter's results, at 8 p.m. ET Thursday.Both the earnings release and a link to the conference call will be available at the company'sinvestor relations website.

The article 3 Things to Watch When Baidu Inc. Reports Earnings originally appeared on Fool.com.

Joe Tenebruso has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.