Baidu Inc (ADR) Stock Declines, Short Interest Rises on Recent Cyber Controversies

In the past one year, Baidu stock has declined by more than 16%.

Baidu Inc (ADR) Stock Declines, Short Interest Rises on Recent Cyber Controversies

By: Abdullah Saeed Qureshi Published:
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In the past one year, Baidu stock has declined by more than 16%

The investors are not pleased with Baidu Inc’s recent performance. The company is entrenched with controversies and tightening regulatory procedures after the death of a Chinese college student who was misled by a paid health advertisement on its online search engine.

Baidu’s stock has dropped down by approximately 14% in the past one year, creating a dark cloud over the company’s future stock performance. Similarly, the recent short interest data released by the Financial Industry Regulatory Authority (FNRA) also shows that the company’s short interest for the current 15-day period shore up by about 4% when compared to the previous fortnightly period.

Baidu’s Stock Performance

Baidu’s stock performance in the past one year has fluctuated rapidly and the trend has caused serious uncertainties in the minds of investors. As evident from the graph, the Chinese internet giant’s stock went down nearly 10% in the past six months and about 4.92% in the past one month. The company’s performance in the past one year has shed doubts over its future outlook.

CBN analyzes why the company’s stock has faced a significant downturn in the recent period and why investors’ seems worried over Baidu’s future outlook.

Baidu Lowers 2QFY16 Revenue Guidance

Baidu Inc, commonly known as China’s Google, announced on June 14 that it is reducing its second quarter revenue guidance as it is faced with stringent regulatory policies and a cut in the number of sponsored ads on its online platform. The news also sent the company’s shares down 5.23% on that day.

Baidu said in a press release: “its 2Q revenue is expected to be between $2.807 billion (18.100 billion yuan) and $2.823 billion (18.200 billion yuan), when compared to the previous revenue guidance of $3.119 billion (20.110 billion) to $3.192 billion (20.580 billion).”

The move came after the Chinese Internet regulator imposed restrictions on the amount of medical advertisements placed on the company’s search engine after the death of 21-year old Chinese student Wei Zexi, who was suffering from Cancer. Zexi used an alternative treatment for synovial sarcoma, an unusual type of tissue cancer, using Baidu’s search engine.

The company received widespread criticism from both the media and the general public. Many questioned the company’s practices and the credibility of the ads placed on its online platform. However, Baidu responded by stating that the company’s top priority is to ensure customers safety and create a user-friendly environment. Baidu controls nearly 80% of the Chinese search engine market and the company’s advertising revenues amounted to nearly 96% of its total revenue in 2015.

However, the recent events created serious disturbances in company’s growth prospects. Though the company has assured investors that the effect of lowering the revenue guidance will be short term and once the company makes adjustments in accordance with the guidelines issued by the authorities, the progress will go on as expected. In addition, the company has also assured regulatory authorities that it will fully comply with the newly issued guidelines. Baidu has assured that it is working to cut the number of sponsored links on its website, which will drive down revenues in the short term but enhance user experience.

Despite the recent controversies surrounding the search engine giant, analysts still believe that the company’s long term potential looks bright. However, it still needs to do a lot to regain investors’ confidence.

Baidu Short Interest

The recent developments have also shore up the company’s short interest position. Baidu reported short interest of about 9.11 million, a four month high compared to the previously reported figure of 8.83 million..

The company’s short interest ratio stands at 2.49 days from 1.58 days reported in the previous 15-day period. This implies that investors’ will need another two days to cover their short position. The short interest ratio was derived using the average daily volume of 3.65 million shares. The following table shows the company’s short interest position for the past four months.

The table clearly illustrates that the company’s short interest position for the past two months has risen sharply, implying that Baidu is losing investor’s confidence and needs to revisit its strategies.

What to Expect Next?

Baidu states that: “The implementation of and compliance with new regulations could take place over a prolonged period of time. The Company notes that high quality medical customers who have reduced or delayed spend would likely be compliant with new regulations over time. As such, the Company expects spend from these customers to recover gradually.” Moreover, the company has also assured its users and stakeholders that it’s doing its best to create a transparent, fraud-free ecosystem for its users.

In addition, Baidu is also aiming to transfer itself from core search business to auto-related industry, which has increased the company’s cost. It is determined to introduce its first autonomous car to be released by 2020. Though the introduction of driverless cars marks a huge milestone, it is also important to note that such efforts require massive investment in Research and Development (R&D). Baidu, up till now, has invested heavily in R&D, which has also contributed towards shrinking revenue.

However, Robin Li, the company’s CEO has stated that the recent revenue downshift is only for the short term and Baidu is going to give its investors a healthy return in the long run.

What’s the Street Opine on Baidu’s Stock Performance?

Analysts at the Street are also conservative about Baidu stock. Out of 32 analysts covering the stock, 13 rate it as a Hold, 17 recommend a Buy and only two tag it as a Sell. The 12-month consensus target price is $196.35 with long term return potential of (17.4%) and a short term return potential of 19.4%.

Though some analysts have criticized Baidu’s practices and questioned the company’s future growth potential, others have also favored the company’s initiative to look beyond economic benefits and work for the benefits of its users and stakeholders by correcting the loopholes and providing a user friendly experience.

Mr. Li said, “Baidu is keen to assist in the development of a healthy, safe, and trustworthy online and offline ecosystem. This is likely to bring in long-term benefits and rewards for Baidu.”