Baidu Inc. Gets a Second Chance to Get it Right

Source: Baidu.

Baidu has another problem with medical advertisers, but it's playing an entirely different role this time around.

Baidu announced over the weekend that it will not accept any more ads from private hospitals that it believes are providing fake medical healthcare information on their sponsored spots. The statement came a day before a boycott on behalf of an association of private hospitals went into effect, according to Bloomberg.

It may not seem like such a big deal on the surface. Baidu doesn't want ads from a group that is vowing to stop advertising on China's leading search engine. It would seem to be a self-fulfilling prophecy, but the ramifications are real. Companies offering medical treatments -- legit or otherwise -- have always made up a big chunk of the Chinese advertising market. The healthcare group encouraging the boycott reportedly represents roughly 15% of Baidu's revenue.

There's a lot of "he said, she said" in the dispute. Baidu claims that it's raising the quality of the advertising on its site, and the association claims that Baidu was pressuring the hospitals to spend more.

Even Wall Street can't seem to agree on how this will play out. Stifel lowered its revenue projections for Baidu on Monday, reiterating its neutral stock rating on the Chinese dot-com darling. Barclays counters that filtering out the bad actors will improve the effectiveness of the platform. Having fewer bidders for related ads may lower the price per click, but winning consumer confidence could result in making that up in volume.

Living through another scandal

This may all seem familiar to longtime Baidu investors. The stock took a big hit in late 2008 when China Central Television ran an expose, taking Baidu to task for including unlicensed pharmaceutical companies in its paid search listings. Baidu vowed to clean up its lax approval procedures, and apparently it's still struggling to stay on top of that even if it's the one proactively cleaning house this time.

The late 2008 stumble took shares of Baidu all the way down to what would now be $10.50 after adjusting for its 10-for-1 stock split. That was a beauty of a buying opportunity. The stock has gone on to be a 20-bagger from there.

Baidu is naturally better suited to counter a boycott challenge these days. Revenue in its latest quarter soared 48% to $2.26 billion with nearly a quarter of that trickling all the way down to net income. The loss of private hospital ads will sting, but we don't know what kind of revenue the next wave of bidders will generate for the same queries.

This is also a reminder that Baidu should be doing more to diversify in terms of both paid search and its exposure outside of China. Baidu responded to a crisis seven years ago, passing in flying colors. Let's see what it can do for an encore this time around.

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The article Baidu Inc. Gets a Second Chance to Get it Right originally appeared on

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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