Baidu Crushed It Again -- So Why Is the Stock Falling?

Baidu (NASDAQ: BIDU) reported results after the market closed on Tuesday and delivered strong results, as its advertising revenue got a boost from Baidu's artificial intelligence (AI) technology.

For the just completed second quarter, Baidu reported revenue of $3.93 billion, up 32% year over year, exceeding analysts' consensus estimates for $3.8 billion, and at the high end of Baidu's guidance. Profits were similarly robust, with adjusted earnings per share of $3.18 soaring past expectations of $2.44 per share.

Baidu's Silicon Valley AI Lab.

Image source: Baidu.

The raw numbers

Metric Q2 2018 Q1 2018 Year-Over-Year Change
Revenue $3.93 billion $3.08 billion 32%
Operating income $819 million $621 million 29%
Adjusted earnings per share $3.18 $2.36 35%

Data source: Baidu's Second-Quarter Financial Report. Differences due to exchange rates. Chart by author.

Baidu's online advertising continues to be the company's cash cow, with revenue of $3.18 billion increasing 25% year over year. The company's online marketing customers grew 9% compared to the prior-year quarter, to 511,000. Existing customers are spending more, too, with revenue per online marketing customer growing to $6,200, a 16% increase from the year-ago quarter. The company is using AI to better match advertising with customers who are more likely to make a purchase.

Revenue for Baidu's core business accounted for $3.03 billion, up 28% year over year, while recently spun off iQiyi (NASDAQ: IQ) generated $932 million, up 51% compared to the prior-year quarter. Baidu still owns a controlling share in the video-streaming service.

Costs necessary to populate Baidu's feed and grow iQiyi's content library grew to $788 million, up 68% year over year. iQiyi continues to encourage its customers to abandon the free, ad-supported side of its platform, with exclusive content available to monthly paying subscribers.

Traffic acquisition costs of $408 million grew 9% compared to the year-ago quarter on increased marketing, while bandwidth costs of $234 million climbed 12% year over year. It's important to note that both costs grew slower than revenue, adding more to the bottom line.

The biggest gainer in the expense column was sales, general, and administrative (SG&A), which grew to $681 million, up a whopping 54% year over year, as the company continues to invest in advertising and marketing.

The future is now

Baidu also continued to spend heavily on state-of-the-art areas like autonomous driving and artificial intelligence. The company is widely regarded as the leader in these cutting-edge technologies in the Middle Kingdom and is investing to remain at the top of its game.

Baidu spent $609 million on research and development, up 28% compared to the prior-year quarter, with the bulk of those increases to hire additional engineers. It doesn't expect these technological advances to add to revenue in the short term, but views this as a longer-term investment.

The company recently completed its Baidu Create Developer Conference , where it announced the development of a specialized cloud-to-edge AI chip, as well as reaching its goal of achieving mass production of a Level 4 self-driving minibus.

Several of Baidu's Apolong self-driving minibuses parked in large warehouse.

Image source: Baidu.

"We had another strong quarter in Q2 with search exhibiting robust revenue growth driven by AI-powered monetization capabilities and Baidu feed continuing strong traffic and monetization momentum," said Robin Li, Chairman and CEO of Baidu.

Looking ahead

For the third quarter, Baidu expects revenue in a range of $4.02 billion to $4.23 billion, which would represent year-over-year growth of between 23% and 30%. Excluding the impact of divestitures, the company expects revenue in a range of $3.91 billion and $4.11 billion, or year-over-year growth of between 26% and 33%.

Baidu reported nothing but good news, so why is its stock falling? The reason has nothing to do with the company's performance.

The Intercept is reporting that Google parent Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) has plans to reintroduce a censored version of its flagship search into the Chinese marketplace. Investors will recall that Google search bowed out of the market in 2010 due to concerns regarding government censorship and breaches of its servers by hackers.

Baidu has had limited competition since Google's departure, so there now are fears that if the search leader moves back into the Chinese market, it could potentially steal market share -- and ad dollars -- from Baidu. It's important to note that Google has not confirmed these reports, so at this point, it's merely rumor and innuendo.

While potential competition from Google certainly bears watching, Baidu is making all the right moves. That's what should be at the top of investors' minds.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares), Baidu, and iQiyi. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Baidu. The Motley Fool recommends iQiyi. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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