Baidu's Stock Plunges After Disappointing Results Prompt An Analyst Downgrade

Baidu Inc.'s stock plunged 13% in premarket trade Tuesday, putting it on track to open at a 13-month low, after the Chinese Internet company's disappointing second-quarter results and outlook prompted a downgrade by Pacific Crest. Analyst Cheng Cheng cut his rating to sector weight, after being at overweight for at least 2 1/2 years. He believes a fair value for the stock is $175, or 11% below Monday's closing price of $197.68. Cheng believes Baidu's online-to-offline (O2O) initiative could eventually boost monetization efforts, but for now, it is creating higher spending and could hurt revenue growth. "These headwinds may last for years and create a 'valley' in earnings growth," Cheng wrote in a note to clients. He also believes greater competition greatly increases risk for Baidu as the company shifts some of its user base from search to O2O.