Will Baidu’s share price recover on Q4 earnings?

Baidu posts delayed fourth-quarter earnings results this week. The firm’s share price has struggled for momentum this year, so what are Baidu’s prospects given the pressures of tougher competition and the coronavirus outbreak?

Baidu’s [BIDU] share price has had a rocky 18 months, plunging from around $272.97 in June 2018 to just $129.80 as of 21 February’s close.

The share price’s downward spiral has been a result of tougher competition from companies such as video-sharing website Bilibili [BILI] and Tencent’s [TCEHY] WeChat, increased regulation of online advertising content in China – from which Baidu generates 73% of its revenue – and the country’s general economic slowdown.

More recently, the impact of the US/China trade war and the outbreak of the deadly coronavirus has spooked investors when it comes to Chinese company share prices.

Indeed, Baidu had to delay the earnings announcement of its results from early February, as it asked employees to work from home and extend their Chinese New Year holidays to help limit the coronavirus spread.

Baidu has also been responding to its other challenges by diversifying its offering through streaming video unit iQiyi, cloud services, smart speakers and AI projects such as driverless cars. But its revenues have still struggled, and its profits have been battered as a result of iQiyi’s ongoing losses and AI investment spend.

In third-quarter earnings results, revenues were flat year-on-year but up 7% on the previous quarter, beating analysts’ estimates. These numbers were helped by better app traffic and demand for its DuerOS voice assistant. Baidu also reported a loss of RMB 6.4bn for the period. So, what’s next for Baidu’s share price?

What to expect from Q4 earnings results

Zacks analysts expect Baidu to report earnings of $2.68 per share in the fourth quarter, representing year-on-year growth of 39.58%. Net sales are expected to experience just a modest increase of 0.17%, coming in at $3.96bn.

Baidu, however, is more optimistic stating in January that it had hiked its fourth-quarter guidance so that it now expects sales of between $4.06bn and $4.15bn, representing growth of between 4-6%. Previous guidance was from flat to a 6% increase.

Profits, under GAAP principles, are tipped to be in the range of $890m to $970m up 37% on last year. Analysts are also expecting revenues to rise 11% in 2020.

Baidu share price vitals, Yahoo Finance, 24 February 2020

What would a turnaround mean for investors and traders?

According to MarketScreener, the mean consensus among analysts on Baidu’s share price is a buy, with an average target price of $150.65.

Leo Sun, writing in the Motley Fool, says that the share price is “historically cheap relative to its growth”.

“Baidu's guidance suggests that its advertising business is rebounding from a tough 2019, iQiyi's profitability could be improving, and its mini programs and DuerOS are locking in more users,” Sun says. “Those improvements could silence the bears, who consider Baidu an also-ran in China's evolving tech sector.”

But others are not convinced, with Chris Markoch writing in InvestorPlace about his concern that Baidu is burning through a “lot of cash” in its transition to products such as AI and the uncertainty around the coronavirus impact.

“The immediate problem is that it may be impossible to understand how serious the coronavirus crisis is. And that’s bad news for BIDU stock,” Markoch said. “BIDU stock was already trailing behind some of the other Chinese stocks over the last 12 months. Baidu stock may not be seriously ill, but right now there are certainly more healthy Chinese stocks for investors to choose from.”

“The immediate problem is that it may be impossible to understand how serious the coronavirus crisis is. And that’s bad news for BIDU stock. BIDU stock was already trailing behind some of the other Chinese stocks over the last 12 months. Baidu stock may not be seriously ill, but right now there are certainly more healthy Chinese stocks for investors to choose from” - Chris Markoch

If and when fears over the coronavirus decline, the US trade war continues to de-escalate, and the Chinese economy begins to pick up again, then Baidu, and its share price investors, will be in a strong position.

In this scenario, Chinese companies would look to ramp up advertising spend, and consumers may begin to spend more cash on iQiyi and smart speakers.

But if the virus does not abate and materially damages the Chinese economy this year then investors need to tread carefully.

Baidu is a long-term bet, but short-term headwinds are still strong enough to blow it off course this year.