Despite declining margins, Baidu stock rose after reporting earnings

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Why Baidu focuses on mobile as its Q4 top-line grows fast (Part 2 of 3)

(Continued from Part 1)

Baidu’s margins declined in Q4 2013

In an earlier article, we discussed how Baidu (BIDU) produced tremendous revenue growth by leveraging mobile Internet use. However, when we analyze the profitability of the company in the recent quarter, profits have actually declined. Baidu earned $460 million in the three months ended December 31, 2013—down 0.4% compared to the same period in the previous year. Baidu attributed the reduced earnings mainly to the increase in operating expenses such as marketing and administrative expenses as well as research and development expenses.

A look at the increase in operating expenses

As shown in the above graph, all operating cost components for Baidu saw a large increase during the last one year. The graph shows the cost components as a percent of revenues, but if we have a look at the absolute increase, components such as marketing and administrative (SG&A) expenses increased 135%, and research and development (R&D) increased 80%. The company attributed the increase in expenses to the following:

  • SG&A: Increases in promotional spending for mobile products
  • R&D: Increases in the number of research and development personnel
  • Traffic acquisition cost (TAC): Increased contextual ads contributions and Hao123 promotions through the company’s network
  • Bandwidth cost: Increases in network infrastructure capacity and iQiyi
  • Content cost: Increases in iQiyi’s content costs

Baidu’s stock was up after the company’s earnings release

Baidu expects profit growth to remain flat over the next financial quarters, as it targets increased sales and marketing investment for its mobile applications in search, security and location-based services. However, the markets did not take the profit growth decline as bad news, and they rewarded the company’s revenue growth instead. Revenues increased from $1.02 billion in Q4 2012 to $1.57 billion in Q4 2013—a 50% increase. Baidu’s American depository shares were up 7.7% to $186.25 in after-hours trading shortly after the results were released.

In fact, the market seems to be rewarding the stocks of other companies also in the search advertising business. A quick look at the above chart will help us understand the kind of increase in stock value that the companies like Baidu, Google (GOOG) and Sina (SINA) have experienced in the last one year. Baidu’s stock has doubled, while Sina’s and Google’s stock have increased by 50% in the last one year.

Continue to Part 3

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