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Keep Calm and Buy Baidu's Post-Earnings Dip

Shares of Baidu (NASDAQ: BIDU) recently fell after the company posted mixed third quarter earnings and guidance that missed analyst expectations. However, there was also a lot of confusion about Baidu's numbers -- the sales miss was minor, and many media reports misunderstood or ignored the reasons for the lower sales guidance. Let's take a look at what happened, and why Baidu's dip actually represents a great buying opportunity for investors.

Its strongest sales growth in five quarters

Baidu's revenue rose 29% annually to 23.5 billion yuan ($3.53 billion) during the quarter, representing its strongest year-over-year growth in five quarters. However, analysts had been expecting slightly higher revenues of 23.6 billion ($3.56 billion).

Image source: iTunes.

Yet Baidu's key businesses were firing on all cylinders. Online marketing revenues rose 22% annually to 20.1 billion yuan ($3.02 billion). Its number of active online marketing customers slipped 7% annually to 486,000 (up 3% sequentially), but that slight decline was easily offset by a 31% annual jump in revenues per online customer -- which hit 40,900 yuan ($6,147) during the quarter.

73% of Baidu's revenues came from mobile platforms during the quarter, up from 64% a year ago. Daily and monthly active users on Mobile Baidu rose 2% annually, while daily time spent on the app rose 15% sequentially. Its video platform iQiyi reached 78 million and 160 million daily active users on PC and mobile devices respectively, with total minutes spent on the platform surging almost 30% annually.

On the bottom line, Baidu's non-GAAP net income rose 163% annually to 9.1 billion yuan ($1.36 billion), or $3.89 per ADS -- which crushed expectations by $1.85 per share. Its GAAP-adjusted net income rose 156% to 7.9 billion yuan ($1.2 billion).

All these figures indicate that Baidu's core business remains healthy, and fears about a slowdown or Tencent's (NASDAQOTH: TCEHY) WeChat ecosystem disrupting Baidu's market are overblown.

But then the media missed the conference call...

Baidu's minor top line miss wasn't the main reason the stock fell -- it was the company's guidance for the fourth quarter. The company expects its sales to hit 22.2 billion to 23.4 billion yuan ($3.35-$3.53 billion) for the quarter, which represents 22%-29% year-over-year growth. Analysts had been expecting about 36% growth.

That miss looks bad, but many media outlets didn't explain the reasons for the lower guidance, which were revealed during the conference call. The first reason was the divestments of its food delivery service, Baidu Deliveries, and the discontinuation of some mobile games. Those businesses were unloaded to streamline Baidu's core business and enable it to invest more heavily in next-gen technologies like AI, smart devices, and driverless cars to counter ecosystem rivals like Tencent.