Holding an 80% share in your core market is a fine thing in many ways, but that level of dominance can also make it harder to achieve growth. Baidu (NASDAQ: BIDU), the Chinese search giant, is shelling out hefty sums across a range of categories in search of that elusive growth, and its investments sapped its profits last quarter.
In this segment from Motley Fool Money, host Chris Hill and senior analyst Andy Cross discuss Baidu's questionable outlook for the next few years, the investment thesis for the stock, and more.
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This video was recorded on May 17, 2019.
Chris Hill: Baidu reported a loss for the first quarter, which is notable because this is the first quarterly loss the Chinese search giant has posted since it went public in 2005. Shares of Baidu falling on Friday, Andy, and hitting a six-year low.
Andy Cross: Yeah. It turns out, 80% market share in your core market doesn't really help you now so much. Revenues up 15%, 21% if you don't include some of the businesses they've sold. Their core revenues were lower than the midpoint guidance they gave by more than a billion Chinese yuan. So strength in education, retail, and their commerce sectors, which were offset by the healthcare weakness, online gaming, financial services. Their other revenues continue to be very strong, driven by iQiyi, which did not have that great of a quarter, and it has struggled as well. But like you said, Chris, first operating loss ever. The guidance was weak for the quarter on the revenue side. But really, the investments they are making, traffic acquisition costs up 41%. Content costs up 47%. Bandwidth costs. SG&A costs, R&D costs. Big investments that Baidu feels like it has to make to remain competitive. It's clearly hurting the operating profits of that business.
Hill: Baidu is often referred to as the Google of China. It is a fraction of Alphabet's size, market cap around $45 billion. But everything you just said, combined with everything I've read about this quarter, it makes me wonder if they're going to be stuck at this market cap for a while now. As you pointed out, when you dominate your home market, there's only so much better that can get.
Cross: Yeah, I think you're right, Chris. It's now not a very expensive stock when you look at it from an earnings multiple perspective, revenue, it's less than 3 times sales, and it sells for less than 20 times earnings. Clearly, investors aren't really expecting it to grow much higher, certainly not what it used to do, and probably not more than 10% a year. I think as they make these investments in AI and technology to be competitive in the Chinese space, it's going to hurt the bottom line, and the growth expectations are going to be slower than what they used to be.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andy Cross has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends GOOGL, GOOG, and Baidu. The Motley Fool recommends IQ. The Motley Fool has a disclosure policy.