The Sell Side Weighs In On Baidu Following Last Week's Earnings

Shares of Baidu Inc (ADR) BIDU were hit with a couple of downgrades following its third quarter revenue drop and weak fourth-quarter top-line outlook.

Baidu’s third-quarter revenue fell 0.7 percent to Rmb18.253 billion, largely in line with consensus. Adjusted diluted EPS of Rmb 9 beat consensus of Rmb7.35.

Apart from the disappointing outlook, which implied a double digit decline in core search, the sequential decline of mobile search monthly active users (MAU) suggests saturation of search user base.

Below is a brief look at some sell side analyses on the stock.

Macquarie

Macquarie has cut its rating on Baidu shares to Neutral from Outperform on increasing competition in online ad market from Alibaba Group Holding Ltd BABA and Tencent Holdings Ltd TCTZF, while online ad regulation could continue to weigh on results. The brokerage also cut its target price to $179 from $199.

“Baidu mentioned that 4Q16 will be the trough for its core search business as they complete the verification process for all ad merchants. While we expect core search to resume growth in 2017 but see increasing competition from Tencent and Alibaba in media market,” analyst Wendy Huang wrote in a note.

As such, Huang cut fourth-quarter and FY17 non-GAAP EPS estimates by 24 percent and 20 percent and trimmed fourth-quarter search revenue estimate to negative 9 percent growth from positive 4 percent growth. The analyst also lowered FY16–19 revenue CAGR estimate to 9 percent from 13 percent.

“While new initiatives such as the mobile in-app News Feed grew nicely during the quarter, with DAU now approaching 70M; we believe its revenue contribution might be too small to move the needle,” Huang highlighted.

Meanwhile, CEO Robin Li has explicitly mentioned that it doesn’t have to hold majority stakes in its O2O ecosystem companies, validating potential M&A opportunities between Nuomi/Baidu Delivery and Meituan/Dianping. Huang said the potential M&A between Nuomi and Meituan/Dianping could add $11 per share to Baidu valuation.

Credit Suisse

Separately, Credit Suisse’s Evan Zhou also downgraded Baidu to Neutral pending a recovery in user product traction and search revenue growth. Zhou also said upside from AI-based applications and commercialization would be “too far out to quantify.”

Oppenheimer

On the other hand, Oppenheimer reiterated its Outperform rating on Baidu, as it believes the search revenues could rebound in the first quarter. In fact, it increased the price target by $12 to $200 underscoring its optimistic view on the company’s fundamentals.

Analyst Jason Helfstein believes sale of majority stakes in loss-making business, such as local and video, would boost margin and valuation. The analyst noted better third-quarter results on margins and company comments suggesting an end to the new compliance process.

However, Helfstein cut 2016/2017 net revenue estimates by 3/10 percent on the later than expected Search rebound, and slower Nuomi (Local) growth.

“Reducing estimates to reflect new short-term factors, but we remain optimistic on BIDU's long-term competitive position,” Helfstein added.

At the time of writing, ADRs of Baidu fell 1.63 percent to $176.67.