Will they or won’t they? When discussing the likelihood of certain Chinese tech companies being delisted from U.S. exchanges, investors have having a hard time reconciling the value of prominent Chinese companies such as Baidu (BIDU) which have demonstrated to have stable, if not growing business.
The U.S. Securities and Exchange Commission, however, would raise the arguments of how would they know if Chinese businesses are stable (or growing), if they are unwilling to comply with U.S. auditing standards. We are now one step closer towards answering this question after the China has announced a preliminary agreement to let U.S. auditors have access to New York-listed Chinese firms. As to what that might mean for Baidu, we may get an answer to that when the Chinese tech giant reports second quarter fiscal 2022 earnings results before the opening bell Tuesday.
Aside from U.S. regulatory pressure, Baidu has fallen victim to the impacts of increased regulatory scrutiny from the Chinese government which has imposed demands for better corporate governance, anticompetitive practices and improved political posturing. These new operating requirements forcing companies to increase its investments in the country, whether in the form of direct sales and marketing dollars or “strategic initiatives” investment.
Meanwhile, Baidu stock has not delivered the returns that investors have expected. But the shares have rebounded some 7% over the past month and are now flat on the year-to-date basis, besting the 15% decline in the S&P 500 index. Currently trading at around $147, Baidu is discounted relative to its long-term potential. For any of this perceived value to matter, on Tuesday the company must speak positively about its growth potential despite the increased regulatory scrutiny in China.
In the three months that ended July, Wall Street expects the Beijing-based company to earn $1.58 per share on revenue of $4.23 billion. This compares to the year-ago quarter when earnings came to $2.39 per share on revenue of $4.84 billion. For the full year, ending in January, earnings are expected to decline 5.3% year over year to $7.67, while full-year revenue of $19.24 billion would rise about 2.2% year over year.
Often referred to as the “Google of China,” the company’s two main business segments are Baidu Core and iQiyi. The former accounts for roughly two-thirds of its revenue, and the remaining revenue comes from iQiyi, which in 2013 Baidu bought a 56% stake. The market is waiting for signs that China’s regulatory crackdown will have minimal impact. If Baidu can weather the tide, it stands to be a strong play on the Chinese tech recovery.
In the first quarter, Baidu reported better-than-expected quarterly earnings and revenue, driven by the strength in its core business, particularly non-online marketing and cloud services. However, Q1 revenue attributed to the video streaming platform iQiyi was $1.15 billion, down 9% year over year. The company reported an adjusted EPS of $1.77 on $4.48 billion, topping estimates of 83 cents per share and $4.16 billion in revenue. The non-online ad business rose 35% year over year to $903 million, driven by cloud and other AI-powered businesses.
Notably, Baidu AI Cloud grew 45% year over year in the quarter. The company also noted that adjusted EBITDA was $867 million, with an adjusted EBITDA margin of 19%, suggesting that the company’s pursuit of higher margin businesses are gaining traction. This is now consecutive quarters of strong earnings that has yielded tons of cash flow. Despite the increased regulatory headwind, the company is executing and reshaping its business towards the future. On Tuesday investors will want to see whether these positive metrics can continue.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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