China’s regulatory crackdown on tech companies such as Baidu (BIDU) are now well-documented. Baidu has fallen victim to the impacts of increased regulatory scrutiny from the Beijing government, and some analysts such as GFM Asset Management’s Tariq Dennison predicts that Beijing’s ongoing enforcement on technology could last up to 30 years.
But can this new environment allow Baidu to execute on its stated objectives? Just as important, can it do so profitably? The Chinese tech giant is set to report second quarter fiscal 2022 earnings results before the opening bell Thursday. China’s pressure on tech companies, the likes of Alibaba (BABA), JD.com (JD) and Tencent (TCEHY), includes demands for better corporate governance, anticompetitive practices and improved political posture.
These new operating requirements imposed by the SAMR also extends to forcing companies to increase its investments in the country, whether in the form of direct sales and marketing dollars or “strategic initiatives” investment. This has sparked fears among U.S. investors that Baidu’s core marketing business won’t grow as expected, nor will it be able to accelerate its growth in the cloud. Baidu stock, over the past year, have not delivered the returns that investors have expected.
However, the shares have rebounded strongly over the past three months, suggesting investors are now more willing to take a risk with undervalued Chinese tech companies. Currently trading at around $138, Baidu is discounted relative to its long-term potential. For any of this perceived value to matter, on Thursday the company must speak positively about its growth potential despite the increased regulatory scrutiny in China.
In the three months that ended June, Wall Street expects the Beijing-based company to earn $1.63 per share on revenue of $4.45 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 December, earnings are expected to decline 3.6% year over year to $9.29, while full-year revenue of $19.87 billion would rise about 20.8% year over year.
Often referred to as the “Google of China,” Baidu has a well-diversified business that is competitive in many high-growth areas. Aside from being leading tech/internet company, Baidu specializes in search engines, artificial intelligence cloud, smart devices, and autonomous vehicles. The company’s two main business segments: Baidu Core and iQiyi. The former accounts for roughly two-thirds revenue. 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 storm, 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 increased regulatory headwinds, the company is executing and reshaping its business towards the future. On Thursday 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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