Chinese tech giant Baidu (BIDU) is set to report first quarter fiscal 2019 earning results after the closing bell Thursday.
The main question on the minds of investors: What it's going to take to get BIDU stock rising again? Analysts, meanwhile, have scaled back their expectations over the past three months. The company’s recent divestments of non-core business, aimed at boosting the bottom line, will be closely watched Thursday. Recent divestments of its financial services and advertising tools segments will also be discussed, along with any other non-core business that could potentially be sold off.
Nevertheless, there’s still a lot to like with this Chinese tech giant. The company’s increased investments in its core search business and artificial intelligence (AI) technologies are two potential catalysts, among others. The company aims to better diversify its business from mobile internet into the realm of smart home, smart transportation, cloud and autonomous driving markets, which could translate to increased revenue growth in the coming years.
As we’ve seen from the likes of Google (GOOG , GOOGL), to which Baidu is often compared, these "heavy investments” come at a cost, which (in the near term) may hurt profitability. To that end, although profitability has been an issue in recent quarters, there have been noticeable signs of improvement, which helped the company deliver a top and bottom line beat in the fourth quarter — reporting EPS of $1.92 per share on revenue of $3.96 billion, topping Street estimates of $1.79 per share and revenue of $3.88 billion. On Thursday, investors will want to see these improvement trends continue.
In the three months that ended March, Wall Street expects Baidu to earn 42 cents per share on revenue of $3.52 billion. This compares to the year-ago quarter when earnings came to $1.88 per share on revenue of $3.01 billion. For the full year, ending in December, earnings are expected to decline 23% year over year to $7.59 per share, while full-year revenue of $17.32 billion would rise 14% year over year.
The company’s operating margins, which have trended lower in recent quarters, have been a subject of debate. Reduced margin typically means either reduced operating efficiencies, loss of pricing power or higher expenses. But the company has expressed its desire to better diversify itself and has identified the markets (smart home, smart transportation, cloud and autonomous driving) it wants to enter. What’s more, Baidu CEO Robin Li has said the company spends roughly 15% of its annual revenue on R&D, with AI-related research taking up almost all of that budget.
In other words, it makes no sense to just focus on operating expenses, while ignoring the growth opportunities. Amazon (AMZN) and Netflix (NFLX) have done exceptionally with the operating model of “if we build it, they will come.” Baidu will be no different. And given that it controls more than 70% of China’s Internet search engine market, it will help if on Thursday if the management spoke confidently about its outlook for 2019 and beyond, while downplaying concerns about the perception of China’s lagging economy.
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