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Baidu Earnings Preview: Revenue Growth Likely To Slow

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Baidu ( BIDU ) is scheduled to report its Q2 earnings after market on July 28. The Chinese internet company has witnessed solid revenue growth in its smaller revenue streams - online video streaming (iQiyi) and transaction services - over the the last 2-3 years. Both segments witnessed 76-77% revenue growth in 2015, which was slightly lower than the triple digit growth in the previous year. Comparatively, Baidu's core search services business grew at 22% year-over-year to $8.4 billion for 2015.

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Last month, Baidu released revised revenue guidance for Q2, reporting only a 10% expected increase in revenues to $2.8 billion. At the end of Q1, Baidu had given revenue guidance of close to $3 billion, which implied 20% annual growth. The company lowered expectations due to a revision in regulatory policy that drove down marketing revenues through the quarter. According to the latest Chinese laws, online ads and marketingpractices for medical, pharmaceutical, and healthcare products and services on online platforms have to go through mandatory regulatory approvals. This will likely weigh on marketing revenues in the near term.

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For the full year, we expect the smaller revenue streams to drive most of the company's revenue growth. We forecast full year revenue growth of around 22% for Baidu. As you can see in the table below, online video revenues are likely to continue to see strong growth through the year. Since the beginning of the year, there have been news reports suggesting that Baidu could sell its online video business, and even received an offer for around $2.8 billion. Although it is the fastest-growing revenue stream within the company, Baidu has operated its streaming video business at a loss over the past few years. However, the company has invested heavily in content acquisition costs, bandwidth costs, and other SG&A and marketing expenses, which indicates a long-term interest in the video streaming business. More recently, Baidu released a statement announcing that it does not plan to sell the business. According to our estimates, the online video division makes up approximately 5% of our $188 price estimate for Baidu's stock , valuing the business at around $3.4 billion.

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Similar to the online video business, Baidu's transaction services division also observed a surge in revenues but an even higher increase in operating expenses over the last couple of years. These operating costs are also attributable to marketing costs and traffic acquisition costs in the same period. We forecast Baidu's transaction services and online video divisions to continue to operate at a loss in the near term.

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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.