Baidu Stock Looks to Bounce Back in 2017

By Rick Munarriz Markets Fool.com

GrowthatBaidu(NASDAQ: BIDU)has hit a wall, but year-over-year comparisons should start to get better later this year. China's leading search engine reported quarterly results after Thursday's market close, and -- as most Baidu watchers imagined -- it wasn't very impressive.

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Revenue in the fourth quarter clocked in at $2.623 billion, 2.6% lower than the prior year on a yuan basis. Back out Qunar (NASDAQ: QUNR) -- the once-majority-owned online travel business that Baidu deconsolidated in late 2015 -- and revenue growth would've been flat.

The biggest blow to Baidu stems from regulators cracking down on the way it presents health-related advertised listings following the well-publicized death of a cancer patient who died after resorting to a treatment center he found on Baidu. The regulatory measures cut into Baidu's high-margin health ads, forcing it to improve the quality of its advertisers.

The aftermath of the incident is substantial. There are now 452,000 online marketing customers on Baidu's platform, a big number but 19% fewer than a year earlier when it wasn't picky about the quality of its sponsors.

The silver lining there is that online marketing revenue declined just 8.2% for the quarter. There was always the fear that Baidu cleaning house of its well-paying but dubious medical advertisers would eat into its business, but online marketing revenue slipping less than half as badly as the marketing customer count means that the average customer is spending a lot more now than a year earlier to generate leads through Baidu.

Image source: Baidu.

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Hitting rock bottom

Declining revenue and Baidu investing in new growth opportunities are eroding its margins. Baidu's adjusted operating profit took a 40% plunge. Its adjusted net earnings of $0.93 a share -- after backing out gains related to an asset sale -- short of the $1.18 a share it posted a year earlier.

Things should get better, even if we may never see the heady growth that made Baidu a dot-com darling in the past. Qunar has now been off the books for a year, so the comparisons will get easier from here on out. Pitting one quarter against the prior year's performance will get a lot easier once we lap the regulatory decision that kicked in during Baidu's second quarter.

Baidu's guidance for the first quarter shows marginal improvement. It sees revenue of $2.374 billion to $2.453 billion, 4.2% to 7.6% growth ahead of the prior year's showing. This may not seem like much, but it will be Baidu's first period of growth after back-to-back quarters of declines. The comparisons will get kinder as the year plays itself out, giving this a good shot to be the start of a turnaround.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool has a disclosure policy.