Baidu Gets Downgraded As Revenues Lose Traction

Credit Suisse downgraded Baidu Inc (ADR) BIDU to Neutral following a drop in its third quarter revenue and the China search giant's warning of a revenue decline in the fourth quarter.

Baidu’s third quarter revenue fell 0.7 percent to Rmb18.253 billion, largely in line with estimates. Adjusted diluted EPS of Rmb 9.92 beat estimates of Rmb7.35.

The company provided a weak fourth quarter revenue guidance of Rmb17.84-18.38 billion (down 2.3 percent to up 0.7 percent year-over-year). The mid-point of the guidance is 4 percent below Credit Suisse estimate's and 7.6 percent below consensus on a bottoming in search revenue in the fourth quarter.

Apart from the disappointing outlook, which implied a double-digit decline in core search, the brokerage said a sequential decline of mobile search monthly active users (MAU) shows early loss of user traction.

“Without a recovery in user product traction and search revenue growth, we find it difficult for the market to re-rate core search from current implied low-teens forward P/E. Optionality from AI-based applications and commercialisation would be too far out to quantify,” analyst Evan Zhou wrote in a note.

Baidu expects core search revenue year-over-year growth to bottom in the fourth quarter as it plans to finish customer validation for all sectors by end-2016.

“Although 2017 search growth YoY is expected to recover, management has low QoQ run rate visibility,” Zhou highlighted.

As such, Zhou cut 2017/18 EPS estimates by 13/10 percent, and core search EPS to US$8.5/US$9.4, respectively. The analyst also cut the price target to $173 from $184.