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Should Investors Bid Adieu To Baidu? JPMorgan Initiates At Underweight

While new ads regulation adversely impacts Baidu Inc’s BIDU 2.74% search growth in the near term, the shift in consumer engagement poses a long-term challenge, JPMorgan’s Alex Yao said in a report. He initiated coverage of the company with an Underweight rating and a price target of $164.

Regulations Make It Tougher

A tightening regulatory environment is expected to cause a slowdown in Baidu’s core search ads revenue growth to 1 percent in 2016, analyst Yao mentioned. He added that although this may recover to 18 percent in 2017, it would be due to a low base effect.

LT Concerns

“Although the impact from regulation should diminish over time, we believe the core search business faces increasing pressure due to ad budget migration to social platforms and verticals as a result of shifts in user engagement and traffic distribution power,” Yao wrote.

Baidu does not have any visible growth drivers beyond search for the next few years, unless the company is able to make a breakthrough in high-tech initiatives like AI. The analyst noted an “increasing likelihood of valuation de-rating” due to:

  • Waning core search growth outlook
  • Transaction and video service struggling for profitability
  • High-tech initiatives still being at an early stage

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Aug 2016JP MorganAssumesUnderweight
Jul 2016CitigroupMaintainsNeutral
Jul 2016Credit SuisseAssumesOutperform

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