After Falling 15% Is Baidu (BIDU) A Buy?BIDU) have lost confidence in the company after it reported second quarter earnings last week. This resulted in the company's shares falling by 15% and shedding $10 billion in market value. Since the start of the year, Baidu is down over 30%. Baidu has been experiencing stiffer competition in China from newer competitors like Qihoo 360 (QIHU) and older competitors like Sohu (SOHU). Both of these competitors have gained market share over the last few years.
Investors, and the market as a whole aren't putting Baidu's second quarter results or its third quarter guidance in context.
Second Quarter Operating Highlights:
- Mobile Users increased to 625 million, a 25% increase from the previous year.
- Mobile Maps Users increased to 305 million, a 48% increase from the previous year.
- O2O service revenues were $6.7 billion, a 109% increase from the previous year.
- Baidu's revenues came in at $2.67 billion, a 38% increase from the previous quarter of last year.
- Mobile revenues was 50% of total revenues during the second quarter.
- Operating Profit in the second quarter came in at $559.6 million, a 2.5% decrease from the previous quarter last year.
- O2O & Other reduced operating margins by 25.3%, and iQiyi reduced operating margins by 5.1%.
Investors, and the market as a whole, are overreacting to Baidu's second quarter earnings and third quarter guidance. They believe that Baidu's competitors are hurting the company and growing their market shares. They're right, Baidu's competitors are growing their market shares at Baidu expense. Qihoo 360 and Sohu have both gained 18% and 3.5% over the last few years in market share. During this same period, Baidu market share has dropped from 80% to 60% of the search market in China. The company may have lost some market share within the last few years, however they still controls 85% of revenues from search ads. Baidu is marvelous at maximizing revenues from search ads.
After shares fell by 15%, Baidu announced a $1 billion share repurchase program for the next 12 months. With the company being a net buyer of its shares for the next 12 months, this will likely prop up the company's share price. Investors in the company are overreacting to headwinds that Baidu faces and are overestimating Baidu competitors. At its current price, Baidu is selling at fair value and offering a forward rate of a 44% return going forward. An intelligent investor has the change to invest in Baidu at a lower price than $170/share.
Published on Aug 5, 2015By Cody Eustice
Posted in ...Market Commentary