Baidu (BIDU) shares have been under pressure, falling more than 15% over the past thirty days, trailing the 1.76% rise in the S&P 500 index. And when looking back over the past six months, the stock has shed almost 40% of its value, while the S&P 500 index has gained 14% during that span. Is now a good time to buy?
The Chinese tech giant is set to report second quarter fiscal 2021 earnings results before the opening bell Thursday. As with the likes of Alibaba (BABA), JD.com (JD) and Tencent (TCEHY), Baidu has fallen victim to the impact of increased regulatory scrutiny from Beijing. China’s regulatory crackdown has sparked fears among U.S. investors that foreign investors will flee Chinese stocks. Cathie Wood's ARK funds recently sold off Baidu shares, among other China holdings, for the same reasons.
This pullback, however, might be a good opportunity for investors who have been on the sidelines. Often referred to as the “Google of China,” the company many initiatives include a stand-alone artificial intelligence (AI) semiconductor capabilities, as well as streaming and autonomous vehicles. Plus, with consecutive quarters of strong earnings that has yielded tons of cash flow, Baidu is ready to put its cash to work, promising to boost its investments by some 30% annually over the next several years.
Meanwhile, some analysts believe the stock is now undervalued by more than 30%. But even that appears conservative. Currently trading at around $163, Baidu still has a consensus Street price target of $308 which implies close to 90% upside. For any of this perceived value to matter, on Thursday the company must speak positively about its growth potential despite the increased regulatory scrutiny in China.
In the three months that ended June, Wall Street expects the Beijing-based company to earn $2.07 per share on revenue of $4.78 billion. This compares to the year-ago quarter when earnings came to $2.18 per share on revenue of $3.84 billion. For the full year, ending in December, earnings are expected to decline 3.6% year over year to $9.29, while full-year revenue of $19.87 billion would rise about 20.8% year over year.
The recent decline in Baidu stock also persist despite an upbeat full-year revenue forecast that anticipates close to 20% growth. The market is waiting for signs that China’s regulatory crackdown won’t impact the company to the extent that the stock punishment suggests. If Baidu can weather the tide, it stands to be a strong play on the Chinese tech recovery. Not only has Baidu’s existing businesses, namely its marketing division, rebounded strongly due to online advertising.
In the first quarter Baidu reported better-than-expected quarterly earnings and revenue, driven by increased ad spending on its internet search platform which rebounded strongly from the pandemic-induced lockdowns. First quarter revenues rose 38% year over year to $4.38 billion. Not only did that figure reverse a downtrend, it beat estimate by $148 million. Q1 adjusted EPS of $1.93 beat estimates by 32 cents.
Baidu’s Q1 online marketing revenue rose 27%, while non-marketing revenue surged 70%. Baidu is also leveraging its AI-based platform-as-a-service capabilities which has now reached an annualized run rate of more than $2 billion. While the company is executing and reshaping its business towards the future, the regulatory scrutiny remains a headwind. On Thursday investors will want to see whether these positive metrics can continue.
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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