KeyBanc Lowers Baidu Price Target, Warns Of Headwinds Ahead

Baidu Inc BIDU reported first-quarter results Thursday that were ahead of expectations, but announced hugely disappointing second-quarter guidance.

While the quarterly guidance reflects macro, industry oversupply and health care headwinds, the resultant reset in expectations could lend upside in the second half of the year, according to KeyBanc Capital Markets.

The Analyst

Hans Chung maintained an Overweight rating on Baidu and reduced the price target from $220 to $179.

The Thesis

The China-based internet service provider reported total revenue of $3.5 billion, broadly in-line with expectations. Operating profit (ex-SBC) came in at $58 million, beating the KeyBanc estimate of a loss of $110.5 million, Chung said in a Friday note. (See his track record here.)

While Baidu Core recorded a higher-than-anticipated operating profit, iQIYI posted an operating loss that was less than feared, the analyst said.

The midpoint of Baidu’s second-quarter revenue guidance is $3.7 billion, implying a significant miss by Baidu Core, Chung said.

The company is facing a challenging macro environment and pricing pressure from inventory oversupply in the industry, the analyst said. The shift to structured data could also have a negative impact on second-quarter revenue growth, he said.

While projections have been reset lower for the year, there are catalysts that could drive the company’s second-half performance higher, Chung said: the acceleration of monetization on newly acquired users; the health care vertical bottoming out; moderating sales and marketing expenses; and the effects of new advertising initiatives.