Wall Street is starting to warm up toBaidu again. China's leading search engine is still trading 37% below last year's all-time high, but the stock's been rolling since bottoming out this summer. Shares of Baidu are trading 15% higher so far in October, and it will probably be on the move one way or another later this week, after it reports quarterly results.
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There's a lot riding on Thursday night's report. Analysts are holding out for another quarter of healthy top-line growth. They see Baidu's revenue soaring 36% since the prior year. Baidu's search engine continues to be the query platform of choice in the world's most populous nation. The migration from PC to mobile is eating away at cost per click, but Baidu is making it up in volume.
There are many moving parts to the Baidu story these days. It's not just the high-margin realm of paid search fueling the healthy revenue growth. Baidu has been expanding into new areas outside its flagship search engine. From streaming video to app marketplaces, there are plenty of opportunities for Baidu to milk more money out of its growing roster of advertisers.
The downside to all of these new initiatives is that margins have been getting crushed. Serving up chunky video files or running a popular group-buying site doesn't offer the same compelling cost structure as search, and investing in ramping up these online-to-offline, or O2O, ventures slows Baidu's earnings power dramatically.
The same Wall Street pros who see a 36% pop on the top line also see a 35% year-over-year decline on the bottom line. This isn't news, though. Baidu's long run of earnings growth came to an end last year. It kicked off 2015 with back-to-back quarters of sliding profits, and Thursday night should bring that streak to three periods. The run of contracting margins actually stretches much further. We've seen revenue grow faster than earningsfor 11 consecutive quarters,according toS&PCapitalIQdata.
The market isn't always patient, and a few on Wall Street havecriticized the profit-draining O2O push. Several analysts have been slashing their price targets on the stock, with more than a few lamenting the thinning margins. This is where Baidu will have to prove itself worthy for growth-stock investors on Thursday. We know the quarter will be mixed, but the stock will probably move based on any comments Baidu makes about when some of these recent low-margin bets will start to pay off. Baidu stock has started to bounce back this month. A strong report will keep it that way.
The article Baidu Has a Lot to Prove on Oct. 29 originally appeared on Fool.com.
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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