After languishing over the past eighteen months, it seems the market is finally ready to reward Baidu (BIDU) for consecutive quarters of strong earnings that has boasted tons of cash flow. Baidu’s strong balance sheet, which compares favorably to its American tech counterparts such as Google (GOOG, GOOGL), is now being applauded. But can the excitement continue?
The Chinese tech giant is set to report third quarter fiscal 2020 earnings results after the closing bell Monday. Baidu shares have risen about 20% over the past two months, compared with a 6% rise in the S&P 500 index during that span. And the out-performance might be just the beginning, according to Gregory Zhao, analyst at Barclays. Citing strong trends in online marketing and AI initiatives, Zhao recently upgraded Baidu shares from Equal-Weight to Overweight with a $170 price target, a 20% upside.
The analyst noted the recent rise in Baidu's marketing division stemming from the recovering online advertising market. What’s more, there also a sense that the so-called U.S. and China tech war, where Chinese stocks had been under consistent scrutiny as U.S. legislation, may eventually de-escalate with a change in the White House. Nevertheless, on Monday investors will want some assurance that the uncertainty with company’s collective businesses will (or can) be removed.
In the three months that ended September, Wall Street expects the Beijing-based company to earn $2.05 per share on revenue of $4.14 billion. This compares to the year-ago quarter when earnings came to $1.78 per share on revenue of $4.01 billion. For the full year, ending December, earnings are expected to rise 7.5% year over year to $7.93, while full-year revenue of $15.96 billion would rise about 4.4% year over year.
The recent rise in Baidu coincides with rising estimates. Three months ago when several Chinese stocks were under threat of being delisted on U.S. stock exchanges Baidu’s full-year profits were expected to decline 12% year over year to $6.39. The upbeat full-year forecast is nonetheless a welcome sign that analysts believe the company has overcome the disruption in its digital ad business that was brought on by the coronavirus outbreak.
Baidu generates roughly 60% of its revenue from its online marketing. In the second quarter, overall revenues fell 1% to about $3.68 billion, though they rose 15% on a sequential basis. The company cited the pandemic’s impacts and weakness in China's economy that hurt advertising revenue. But the company was able to offset the revenue weakness with a sharp decline in operating expenses, which lead to a 187% surge in profits.
Just as impressive, the Baidu App saw a 30% increase in daily active users to 222 million users, while in-app search queries continues to rise. The company has placed the AI-powered Baidu App at the center of its growth strategy, particularly for its marketing cloud platform. On Monday investors will want to see the metrics that suggest continued improvement on that strategy. Analysts will also look for clues that Baidu’s online marketing segment can finally shift from improvement to sustained growth.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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