Baidu Will Have a Lot to Prove Tomorrow

By Markets Fool.com

Image source: Baidu.

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Stepping up for its quarterly financial updates is rarely a problem forBaidu (NASDAQ: BIDU). China's largest search engine has been a dot-com darling over the long haul. The stock is a 60-bagger since going public 11 years ago, and you don't deliver that kind of heady run without consistently coming out ahead quarter after quarter.

Baidu will be reporting its results for the second quarter after the market close tomorrow. Investors that are uncomfortable with any near-term hiccups may not want to sleep through the release.

The quarter itself is going to be problematic. It will be its weakest period of year-over-year revenue growth as a public company, even if it lands well ahead of the high end of its guidance range. Profitability will likely post a year-over-year decline for the fourth quarter in a row.

A rough quarter isn't going to be a surprise. Growth has slowed as Baidu matures, and diversifying into low-margin areas outside of search has weighed on profitability. However, there are a couple of things that will make Thursday's report more challenging. Between a speed bump in its asset sale and uncertainty with what its top-line guidance will be we haven't gone into a Baidu report with this many question marks in a long time.

Slowing the game down

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The Cyberspace Administration of China is raining on the way that search engines in the world's most populous nation do business. The outrage over the death of a cancer patient that sought treatment at a dubious medical center he found through Baidu is forcing all search engines to scale back the way that they present the once lucrative health-related paid search ads.

Baidu began rolling out the changes at the beginning of May, and it had a pronounced impact on the second quarter. Baidu slashed its revenue guidancein mid-June as a result of adjusting its search listings. It was originally forecasting $3.119 billion to $3.192 billion in revenue for the current quarter, but that was whittled down to a range of just $2.807 billion to $2.823 billion.

That's a lot of trimming, and it's the result of a change that happened a third of the way into the second quarter. How bad will the guidance for the third quarter be? The updated guidance happened in mid-June, so what happens if the quarter continued to deteriorate and it falls short of even the low end of its range?

Baidu's guidance is going to go a long way in dictating which way the stock moves on Friday, but it will also be pressed to discuss why negotiations broke down on the sale of its iQiyi video hub. The deal would have scored roughly $2.25 billion for Baidu's majority stake. Investors are going to ask Baidu if it will be able to keep cashing in on its non-core assets, and that will be just one more question that it will have to answer to the market's satisfaction.

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Rick Munarriz 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.