Pacific Crest Downgrades Baidu, Says Spending Could Rise And Monetization Could Be Low

In a report published Tuesday, Pacific Crest analyst Cheng Cheng downgraded the rating on Baidu Inc (ADR) BIDU to Sector Weight. The analyst believes that the transition to O2O is leading to margin and revenue growth headwinds.

"O2O may be the better long-term course for Baidu, but we believe it could be entering several years of low earnings growth," Cheng said, adding, "O2O creates higher spending and potential for revenue cannibalization."

The company is meaningfully increasing its spending on the transition during 2H15, while the management indicated that providing search traffic to O2O ventures could adversely impact revenue growth.

Although this O2O shift is likely to eventually drive higher monetization, the analyst believes that given the intense competition in this arena, significant monetization could be several years away.

"We believe the quantity and quality of these competitors greatly increases risk for Baidu as the company shifts some of its user base from search to O2O," the Pacific Crest report added.