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Baidu Stock Needs Strong Q2 Earnings

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Baidu (BIDU) stock has fallen significantly in the last 12 months. Currently, the stock is trading at $111.79, which is 58.0% below its 52-week high of $265.73. Baidu shares have grossly underperformed its peers in the last few years. The stock has fallen 29.5% since the beginning of 2019, 30.9% in the last three years, and 45.6% in the last five years.

In comparison, the S&P 500 ETF has returned 20.7% YTD (year-to-date), 48.8% in the last three years, and 68.6% in the last five years. The Invesco QQQ Trust Series ETF has returned 25.2% YTD, 76.8% in the last three years, and 113.5% in the last five years.

Baidu’s struggles continue

Baidu stock has lost investors’ confidence. The company reported its first generally accepted accounting principles loss as a publicly listed company in the first quarter. Baidu’s management attributed the loss to iQiyi streaming—the company’s video streaming subsidiary. Baidu released significant ad inventory during the Chinese New Year.

An aggressive marketing campaign in the first quarter impacted Baidu’s operating margin. The company was the lead sponsor for China’s mega-event known as “Chunwan.” The event was China’s most viewed event. According to estimates, Baidu spent more than $40 million to get the sponsorship. The traffic acquisition cost rose 41.0% to $474 million in the first quarter.

As a result, Baidu’s operating margin fell to 2.0% from 26.0% in the same period the previous year. The stock fell after the company’s first-quarter results. The stock has also been impacted by the ongoing trade war between the US and China. Baidu’s second-quarter earnings need to be in line with analysts’ estimates.

Analysts expect sales growth

Analysts expect Baidu’s revenues to rise 0.7% YoY (year-over-year) to $3.77 billion in the second quarter. The company’s adjusted EPS is expected to be $0.94. Baidu reported sales of $3.74 billion with an adjusted EPS of $3.03 in the second quarter of 2018.

Will Baidu be able to beat analysts’ estimates in the second quarter? Let’s see how the company fared historically. Baidu beat analysts’ estimates in three of the last four quarters.

  • The first-quarter EPS of $0.40 was 4.8% below analysts’ estimates of $0.42.
  • In the fourth quarter of 2018, the EPS of $1.96 beat the estimate of $1.75 by 12.0%.
  • The EPS of $2.75 in the third quarter of 2018 beat the estimate of $2.42 by 13.6%.
  • In the second quarter of 2018, the EPS of $3.03 beat the estimate of $2.39 by 26.8%.

Baidu is expected to struggle with profitability for the rest of 2019. Analysts expect the EPS to fall 69.0% YoY in the second quarter, 48.7% in the third quarter, and 55.2% in 2019.

Is Baidu stock undervalued?

Does the recent pullback mean that Baidu shares are undervalued? The company has a forward PE ratio of 16.6x. The stock still looks overvalued considering its five-year EPS growth of 7.8%. Baidu will need to improve its bottom line quickly to keep investors interested.

Analysts are optimistic

However, Wall Street analysts are optimistic. Among the 33 analysts covering Baidu, 19 recommended a “buy,” 12 recommended a “hold,” and two recommended a “sell” on the stock. Analysts have an average 12-month target price of $163.27 for Baidu. The target price indicates an upside potential of 46.0% from the current price.

Baidu has a 14-day RSI (relative strength index) score of 36, which suggests that it’s trading very close to the oversold territory. An RSI score above 70 suggests that a stock is overbought, while an RSI score below 30 suggests that it’s oversold. Now that the stock is trading around $111.79 per share, it could see short-term resistance around $119.0 per share. The stock could see support at $108.0.

Baidu could stage a comeback. The company still accounts for 70.0% of China’s digital advertising market. Baidu warned investors about slower revenue growth in the second quarter. The company’s sales growth is set to accelerate going forward. Analysts expect Baidu’s sales to rise  3.9% to $15.79 billion in 2019, 15.0% to $18.15 billion in 2020, and 14.1% to $20.85 billion in 2021.

Baidu has several revenue drivers. The company has become a major player in the global smart speaker market. Baidu had a share of 15.8% and shipments of 4.1 million units in the first quarter. China’s smart speaker sales rose 500.0% YoY in the first quarter. The company has gained significant traction in the smart speaker space. The company’s market share was below 1.0% at the end of the first quarter of 2018.

If Baidu beats analysts’ estimates and provides upbeat guidance, the shares will gain significant value following its second-quarter results.

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