The Wall of Worry



Baidu will unveil June quarter earnings after markets close in New York later today. Jefferies analyst Karen Chan expects the Chinese internet giant’s net profit (using non-generally accepted accounting principles, or non-GAAP) to beat analyst estimates by 7% and its revenues to land at the mid-point of the Chinese search giant’s forecast range.

The report from Jeffries went onto highlight “we expect 2Q17 revenue to come in at the mid-point of guidance range at RMB20.7bn, in-line with consensus, and non-GAAP net profit of RMB3.8bn, 7.4% above Street. We estimate non-GAAP operating margin of 17.6%, +2pcpt QoQ, helped by control in traffic acquisition cost and sales & marketing spending partially offset by increase in AI-related R&D spending and content cost. We tweak down 3Q17 revenue est. by 0.5% to RMB23.4bn but keep our FY17 est. unchanged at RMB85.9bn, +21.8% YoY, reflecting a more back-ended loaded revenue ramp in mobile newsfeed.”

We have thought for some time that Baidu has seriously lagged the other major Chinese internet stocks and that after a problematic few years, top line revenue growth will reassert to the upside. I will be focusing on Baidu’s search recovery outlook, mobile newsfeed advertising traction, content investment, and sales & marketing spending.

Baidu has had success in the past year converting eyeballs to advertising dollars with its upgraded mobile Baidu v9.0. User stickiness appears to have improved for Baidu in recent months. Baidu is the largest position in the Fat Prophets Global Contrarian Fund and our international Managed Account portfolios.

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Disclosure: The Fat Prophets Contrarian Fund declares a holding in Baidu.

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