Baidu Stock Investors Need Some Perspective Headed Into Today’s Q4 Results

Baidu (NASDAQ:BIDU) desperately needs a win. So to BIDU stock investors who’ve seen the shares fall about 26% since the end of September, versus the Nasdaq Composite index‘s almost 7% decline.

While Baidu may be the dominant search engine in China, that dominance didn’t allow BIDU stock to sidestep that drubbing as new tariffs stoked fears of an economic slowdown.

Those fears have since abated when the eastern Asia didn’t crumble into the ocean in the wake of President Trump’s tariffs. In fact, Baidu stock has leveled off since hitting a major low in December, and has even toyed with a rebound.

It’s not over the hump, though. It still needs a convincing win to put BIDU stock back in full-bullish mode.

The company will get a chance to earn that victory later today, after the closing bell rings. That’s when Baidu is slated to post its fourth quarter numbers. Whether or not the market will see a glass that’s half-empty or half-full, however, will largely depend on how well the company manages the narrative.

Changing Market for Baidu

In the same sense that it’s difficult to not respect that Alphabet (NASDAQ:GOOGL) flagship Google business is the leading gateway to the digital universe in the western hemisphere, it’s hard to ignore that Baidu fields 80% of web searches in China.

Also much like Google, Baidu is starting to stumble into the trappings of age and a maturing market.

Chief among those trappings is a shift in how consumers tap into the web, and how advertisers connect with those consumers.

In the same way Facebook (NASDAQ:FB) and even Amazon.com (NASDAQ:AMZN) are becoming serious threats to Google in an increasingly mobile world, indirect rivals Alibaba (NYSE:BABA) and Tencent Holdings (OTCMKTS:TCEHY) — which owns and operates a handful of social media venues — are an alternative advertising medium.

Meanwhile, more and more Chinese websites are placing content out of reach of Baidu’s indexing regime, making it more difficult for browsers to find that content, let alone use it as a means of driving ad revenue.

The final piece of the trifecta of challenges: The search engine giant’s ad business faces ever-increasing regulatory scrutiny from China’s cyber police.

End result? Its third-quarter operating income fell 6% year-over-year, driving operating margins down from 21% to 16%.

That underlying margin headwind hasn’t gone away, and will undoubtedly be an important focal point during and after the Thursday’s fourth quarter call.

BIDU’s Other Tech Interests

It’s a shift that will never revert back to the underpinnings of Baidu’s glory days earlier this decade. Mobile is here to stay, and advertisers enjoy their expanding options.

Baidu isn’t sitting on its hands, though. It’s waded waist-deep into artificial intelligence waters, and autonomous cars in particular. Its Apollo self-driving automobile platform is open-source, setting the stage for it to become the Android of the autonomous vehicle world.

Baidu has also borrowed a page from the Google and Amazon playbooks, developing its own smart speakers.

All are compelling initiatives to be sure. But, they’re not short-term ones that will provide much of a boost for BIDU stock, right now when they’re needed the most. As Nomura China’s analyst Jialong Shi recently explained: “For Baidu these few years are difficult years. Their current cash cow, the search engine business, is facing a structural issue: many users and contents and time are taken away by the super-apps, while their new revenue drive, AI, is still in a cultivation stage.”

That’s the proverbial rub for current and prospective shareholders. The company is well-positioned for whatever lies three years down the road. But, a cloud of uncertainty looms above the company’s three-month prospects.

It’s unlikely Baidu will be able to offer up much in the way of near-term assurance in today’s conference call. But, the 12% gain from the early January low is a decent hint that the market is at least willing to entertain an encouraging message.

Earnings Preview for BIDU Stock

Though the company’s long-term initiatives will be poked and prodded coming out of the earnings conference call, the knee-jerk response will mostly be rooted in how the company fares against expectations.

To that end, analysts are collectively calling for Q4 revenue of $3.88 billion, up 14.4% year-over-year. In the wake of waning pricing power and ramped-up spending though, those same analysts are calling for per-share profits to shrink from Q4-2017’s $2.15 to only $1.76 per share of BIDU stock for the final quarter of last year.

It’s an estimate that’s built to beat, as Baidu has done for the past 10 consecutive quarters. But, if any breakout move is going to last, the company still needs to fully illustrate it can thrive ‘in the meantime’ while its bigger picture bets are still brewing.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.

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