What to Expect From Baidu Inc (ADR) 2QFY16 Earnings Results?

The upcoming quarter is not going to be a positive one for Baidu, believe analysts.

What to Expect From Baidu Inc (ADR) 2QFY16 Earnings Results?

By: Abdullah Saeed Qureshi Published:
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The upcoming quarter is not going to be a positive one for Baidu, believe analysts

Baidu Inc (NASDAQ:BIDU), China’s Internet giant is set to announce second quarter fiscal year 2016 earnings results on Thursday, July 28, 2016 in the after-market hours. By having a look at Baidu’s historical performance, China Business News examines whether Baidu’s upcoming earnings results will shine or bring woes for investors.

For the past six months, China’s largest search engine is surrounded by cyber controversies; as a result of which, its performance has also deteriorated. The investors are also not pleased with search engine’s recent performance. Baidu, which holds more than 80% of China’s search market, has been entrenched with tightening regulatory measures after a Chinese college student lost his life amid a misleading sponsored medical advertisement on its online portal.

After the incident, the Chinese Internet giant faced immense criticism from both its users and the media and the country’s Internet watchdog also put a limit on the amount of medical ads advertised on the company’s search engine. Baidu, which generates more than 90% of its revenue from advertisements said that a significant amount of revenue is likely to be sacrificed; however, the implications of it would only be for a short term. The event caused Baidu’s shares to decline more than 5%.

The after-effects of the event also caused the company to reduce its revenue guidance for the upcoming quarter. Baidu said: “It expects its 2Q revenue 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). In percentage terms, the revenue guidance was reduced by approximately 0.005%.”

Recently, it also fell into a new regulatory probe after the Chinese Internet regulator received complaints against it over promoting illegal activities. Reports from Chinese media last Monday highlighted that Baidu is involved in providing a platform to stimulate illegal gambling websites. Reports also highlighted that Baidu’s employees profited from such activities. Cyber Administration of China (CAC) said: “We will conduct a strict investigation and handle any illegal behavior accordingly.”

Baidu Stock Performance

The company’s stock has fell down more than 14% in the last one year, creating a dark cloud over its future stock performance outlook. The following graph shows its stock performance for the past 12 months.

The above graph clearly depicts Baidu stock's fluctuating performance in the past one year. The trend has caused serious uncertainties in the minds of investors as well. In the past one month, China’s Google stock has fell 4.92%, and in the past six months, the stock has went down more than 10%, shedding serious doubts over its future outlook.

Meanwhile, the company has kept assuring its investors that the implications of revenue decline will only be for the short term; however it may cause serious disturbances in company’s future growth prospects. Despite the recent controversies surrounding the search engine giant, analysts still believe that the company’s long-term potential looks bright. However, the company still needs to do a lot to regain investors’ confidence.

Baidu Earnings Estimate

Analysts at the Street expect Baidu to report a healthy second-quarter earnings despite the ongoing cyber controversies. According to consensus estimate, Baidu is expected to report net income of $470.586 million (2.729 billion yuan) in 2QFY16, representing a 21.1% surge in estimates. In 1QFY16, the company reported net income of $308.1 million (1.987 billion yuan).

Revenue

Analysts at the Street expect Baidu to report revenue of about $2.720 billion (18.169 billion yuan) in the upcoming quarter. This represents an 11.5% surge in revenue estimates, when compared with the previous quarter. However, the company itself announced a decrease in revenue guidance due to ongoing cyber controversies. The company expects its revenue to remain between $2.807 billion (18.100 billion yuan) and $2.823 billion (18.200 billion yuan) in 2QFY16.

The following table shows Baidu’s key financial metrics for the past quarters.

Baidu’s previous quarters results show that the company has performed better than the expectations in the past five quarters. However, Baidu itself has remained conservative on its outlook this quarter. Out of five occasions, the company has been able to beat revenue estimates four times. Likewise, the company’s stock on three occasions has remained in green after the next day of earnings release while the stock has remained in the red on two instances .

The incline in revenue was primarily due to higher advertising revenues in the previous quarters. Last year, Baidu’s advertising revenue constituted about 96% of company’s total revenues.

Earnings per Share (EPS) Outlook

As per the consensus estimate, Baidu is expected to report earnings per share (EPS) of about $1.210 (8.078 yuan) in the upcoming quarter. The analysts at the Street have raised their EPS estimates despite uncertainties revolving around the Chinese search giant. In percentage terms, EPS estimate has been raised by about 19.5%.

On three out of five occasions, the company missed its EPS estimates. The decline is mainly attributable to economic uncertainties in China together with strict Internet regulations. Baidu, which has agreed to fully comply with all the regulatory changes, has also agreed to decrease the no of paid ads on its online portal. This will directly affect the company’s revenue and thus net profit, which in turn will also drive down the EPS.

Short Interest

The ongoing events have also shore up the company’s short interest position. According to data released by the Financial Industry Regulatory Authority (FNRA), Baidu’s short interest in the first fortnightly period of June surged about 4%. It reported short interest of 9.11 million shares, a four-month high compared to the previously reported figure of 8.83 million shares. This implies that investors are losing confidence on the company’s shares.

In addition, “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.”

What to Expect Next?

Baidu states: “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 spending from these customers to recover gradually.” This implies that the company will take time to recover its revenues. In the short term, investors should remain cautious, while making investment in the Chinese Internet giant.

In addition, an important thing to note is Baidu’s attention shift from its core search business to auto-industry. The company is working on its first autonomous car, which is expected to hit the marketplace in the next five years. Though the creation of a driverless car is a huge milestone, this also requires huge investments, especially in research and development (R&D). This in turn will increase the cost incurred by the company and may contribute to shrinking company’s revenue.

Though Robin Li, Baidu’s CEO has assured investors that the revenue downshift is only for a shorter period and investors should expect healthy returns in the long run.

Baidu’s Future Outlook through the Eyes of the Street

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.

Analysts at the Street are conservative on the company’s future outlook. Out of total 32 analysts covering Baidu’s stock, 17 shares bullish sentiments with a Buy rating, 13 are still calling it a Hold, while only two thinks it a Sell. They believe that Baidu will give its investors a negative long-term return of about 17.4% and a positive short-term return of about 19.4% at a target price of $196.35.

It will be important to see how the earnings result turns out; and how much the tightening Internet regulatory policies have impacted the results. On a positive note, Baidu’s efforts to correct the loopholes should be acknowledged.

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.”