Baidu Stock Has a Lot to Prove on Oct. 27

By Markets

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The already volatile shares of Baidu (NASDAQ: BIDU)may be moving more than usual next week. China's leading search engine operator will be posting financial results after next Thursday's market close, and there's a lot riding on the third-quarter numbers.

It's not fair to call the internet pioneer a dot-com darling anymore. Baidu stock may have moved higher in eight of its first 10 years as a public company, but the shares slipped 17% last year and are also trading lower year to date. It's going to need a strong report if it wants to avoid this being Baidu's first case of back-to-back years of declining stock prices.

Baidu may have earned this year's downticks. Revenue growth has slowed dramatically after an unfortunate springtime incident forced it to pare back on its once lucrative health-related ads. It also didn't help that plans to unload a profitless but valuable business were undone by angry activists.

This all sets the stage for a meaty financial update that will be the last one announced by Baidu during the calendar year. If a turnaround in fundamentals will spark a turnaround in its stock price, it will probably have to be made clear on Oct. 27, and that's a lot of pressure for a company that was a rock star for growth investors before peaking in late 2014.

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Analysts see revenue of $2.8 billion for the quarter, 4% below where it was a year earlier. They see profitability taking an even bigger hit, slumping 22% to hit $1.11 a share.

Watching the top line outperform the bottom line isn't new at Baidu. We've seen that happen in recent years as Baidu expands from its high-margin search business to embrace new initiatives that aren't paying off right away. Organic net margin peaked at an impressive 46.9% in 2012, and we will probably never revisit that level.

The revenue dip may come as a shock, but there are two good explanations for this.A cancer patient turned to Baidu's search platform to find a treatment center earlier this year, and unfortunately found a sponsored listing for one that was questionable and ultimately unsuccessful. The patient called out Baidu in his final days through social media, and that inspired regulators tocrack downon the way that advertisers in general and Baidu in particular were displaying sponsored listings for medical search queries.

The other factor weighing on year-over-year top-line comparisons is that Baidu deconsolidated its online travel business recently. Baidu's guidance earlier this summer called for 5% to 9% in organic top-line growth, better than the slight dip at the midpoint of its range on a reported basis.

Numbers alone used to propel Baidu higher, making it one of the market's biggest winners during its first decade as a public company. Mr. Market's going to need more than that now. It will need some news on improving fundamentals for its other businesses including video streaming and running mobile app marketplaces. Baidu has transformed into something that hasn't been appealing for investors since late 2014, but you don't get in the way of a company with a history of bouncing back in a major way when it seems to be slipping. Yes, Baidu has a lot to prove next week.

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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.