Baidu Can't Seem to Stay Above $200

By Rick

Source: Baidu.

It was a rare sight to seeBaidu close above $200 last week. Fueled by an encouraging quarterly report late last month and bullish sentiment returning for Chinese growth stocks in recent weeks, Friday's close of $200.30 was the first time that the stock had topped $200 at the end of a trading day since July.

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It didn't last. The stock may have tipped its head over the $200 mark in three of this week's first four trading days, but it has yet to close at or above the mark. Baidu stock is doing pull-ups, but investors would rather see it just pull up. The stock has soared 45% since the start of last month, but it's still trading lower for all of 2015 -- and more than 20% below its all-time high set late last year.

The market has a love-hate relationship with Baidu. Margins continue to contract as the leading Chinese search engine invests in new businesses. Online-to-offline -- or O2O -- has been Baidu's mantra in recent quarters. It's investing in streaming video, group-buying websites, and mobile app marketplaces. These are profit killers at the moment. Investors used to the fat-margin fruit of paid search that Baidu was commanding when it was mostly a search engine have seen the trend reverse over the past three years. Net margins peaked at 46.9% in 2012, and that revenue-milking ability has been whittled down to just 19.7% over the past 12 months, according toS&PCapitalIQdata.

The erosion has been consistent. Trailing net margins have declined for 12 consecutive quarters. Wall Street hasn't had a choice but to hose down their profit targets. As strong as market sentiment has been since a bruising summer correction, analyst earnings estimates looking out to next year have dipped by 8% over the past three months. In other words, the market is braced for the bottom line crunch to continue.

The good news is that Baidu remains the undisputed champ of search in the world's most populous nation, and revenue continues to grow at a steady clip. Baidu's top line has grown at a nearly 39% rate over the past year, including a 36% year-over-year pop in its latest quarter.

That's the love and the hate of Baidu in a nutshell. It has primo positioning in the juiciest online market -- paid search. However, margin expansion keeps getting pushed further away as it delves into new categories. That may seem like a bad thing, but it's also the reason why no one is talking about Baidu missing the boat in mobile migration. Concerns that it was relying too much on desktop usage were fair a couple of years ago, but that's certainly not something that worrywarts are saying these days. Baidu is a leader in marketplaces for mobile apps and online video. Backed by 643 million monthly active users on its mobile search platform, why wouldn't it be investing in new ways to funnel that traffic into other categories?

As long as you can ignore the bottom line, Baidu is in a good place -- with bountiful cash reserves to make you accept the near-term shortcomings. Whether or not it finally breaks through $200 convincingly now or later, Baidu is just where it needs to be fundamentally.

The article Baidu Can't Seem to Stay Above $200 originally appeared on

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.

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