Baidu's (BIDU) long-suffering bulls finally had a reason to smile Monday, as the Chinese online-search giant reported stronger-than-expected Q2 earnings.
The numbers themselves weren’t great — revenue was nearly flat, only growing 1% since last year, while net income fell 56%. But analysts were expecting much worse on the profit-side, with EPS beating estimated by $0.55 and contributing to shares rising.
The company still relies heavily on online ads sales, accounting for 73% of second-quarter sales, but faced considerable challenges during the quarter, including the US-China trade war, slowing Chinese economy and stronger competition. Nevertheless, 5-star Bank of America analyst Eddie Leung maintains his Buy rating and $181 price target on BIDU stock. For perspective, the stock closed at $108.72 yesterday, so this implies upside of nearly 66%.
A deeper dive of Baidu’s report shows that trouble comes from its main revenue source, ads. Often dubbed “core” or “ex-iQiyi” revenue in reference to its video streaming platform, this stream was down 2% year-over-year as iQiyi saw a 50% rise in subscribers. This contributed to higher sales in Baidu's “other” category, which includes video and cloud. But the drop in core revenue doesn’t concern Leung, who expects a “similar dip” next quarter, as well.
Leung’s lack of concern comes from other strong metrics. The analyst says, “Baidu’s core traffic is still growing, underpinned by its mobile apps which had daily users up 27% YoY and search queries up 20% YoY,” which makes him optimistic that the service is still strong. In other words, Baidu’s challenge is more related to business-factors, including competition and the trade war, than whether or not users value its service.
Aside from search, Leung says Baidu’s report shows that users “are also spending more time on its platform, driven by richer content (e.g. self-media accounts, news, mini-video, knowledge-based content), more services (e.g. mini-program features), better targeting, and, to a [lesser] extent, IoT such as smart speakers and in-car Internet.” This continues to reinforce Leung’s position that the problem is not with Baidu’s offerings, but with the company’s ability to monetize.
Looking ahead, the analyst is keeping his “growth assumption for its core sales at low- to mid-teen % in 2020 and 21,” as Baidu is “keeping [operating expenses] in check” in a time of slow revenue. Though Leung sees “margin upside of the core biz after stable op exp. (YoY) in 2Q19,” the analyst is cutting his 2020 and 2021 estimates.
All in all, even as Baidu faces strong headwinds, including the US-China trade war and stiffer competition, the Wall Street community is optimistic on the stock. TipRanks analysis of 14 analyst ratings shows a consensus Moderate Buy rating, with eight analysts saying Buy, while six suggest Hold. The $144.32 average price target represents ~34% rise from current levels. (See BIDU's price targets and analyst ratings on TipRanks)