Baidu's Lost That Loving Feeling

By Markets Fool.com

Image source: Baidu.

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Another Wall Street firm is down on Baidu (NASDAQ: BIDU). Alex Yao has assumed coverage of China's leading search engine at JPMorgan, and he's tagging the stock with a bearish underweight rating. His price target of $164 is just 4% lower than yesterday's close, but the stock did also surrender 4% of its value yesterday following the refreshed coverage.

JPMorgan used to have a price target of $190 on the shares, but Yao's updated read isn't as rosy. He's concerned that despite all of Baidu's attempts to diversify across several businesses that it still lacks needle-moving growth drivers outside of search. Unfortunately for Baidu, he also sees the dot-com giant's core search business coming under attack as ad dollars flock to social platforms and verticals.

Yao is also concerned that user engagement trends at Baidu have been deteriorating. If you buy into his thesis that marketing budgets will follow the populous nation's youth into social media sites, it makes any setback in search alarming. Factor in the regulatory scrutiny that has been eating at Baidu's year-over-year growth since May, and his bearish case is complete.

His $164 price target may not be that much lower than where the shares are now, but Yao feels that the likelihood of a sharp drop have increased in this climate.

Batting order

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Yao isn't the only analyst to lower his price target this summer. Several Wall Street firms slashed their price goals a little over a month ago after Baidu posted disappointing financial results for the second quarter.

  • Brean Capital went from $220 to $197 on the stock.
  • Piper Jaffray analyst Gene Munster slashed his price goal from $215 to $180.
  • Oppenheimer's Jason Helfstein tweaked his target price from $196 to $188.

A big difference between JPMorgan's Yao and these three other price goal revisions is that those firms stuck to their bullish ratings on the stock. It may seem like the safest path to take. Baidu has been hosing down its prospects, lowering its full-year guidancetwicethis summer.

The biggest reason for what has now been at least four analysts chiming in with lower price targets and Baidu itself tweaking its top-line goals twice this summer is a springtime incident where someone died after seeking treatment for cancer at a questionable center he found as a sponsored listing on Baidu. Regulators moved quickly to cap the quantity of ads and the quality of the advertisers that could be featured on health-related queries across all search engines. It is why Baidu's guidance now calls for just 5% to 9% in organic year-over-year growth for the current quarter, the weakest showing by far for Baidu as a publicly traded company.

Short stop

The real surprise through all of this is that short interest has actually been falling sharply in recent months. Investor bearishness peaked at 9.1 million shares sold short as of mid-June. That interest has been shaved down to 4.6 million as of mid-August. It's not often that you'll see short interest cut essentially in half over the course of two months, particularly at a time when analyst price targets and corporate guidance is getting slashed. There's also been the decimation of plans to sell its money-losing video streaming business to an insider-led group that would've resulted in $2.25 billion as a gross payout for Baidu.

It could be that investors think that the downside is limited here, contrasting JPMorgan's Yao who sees a greater risk for a sharp stock slide. With the year-over-year growth comparisons getting kinder come next May and its growth drivers being that much closer to making a difference, the future may not be as scary as recent Wall Street moves make it out to be.

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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.