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Baidu's Rating, TP Cut by Summit Research on Margin Woes

Recently, Baidu, Inc. 's BIDU rating was downgraded to "Hold" from "Buy" by Henry Guo, an analyst at Summit Research. In addition, he reduced the price target by 26.8% to $150 from $205.

Guo is concerned about Baidu's weakening margin profile due to stepped-up investment in Online-to-offline (O2O) commerce.

O2O is a fast growing sector in China and considered to be the future model of e-Commerce in the country. Growth in this space is supported by the shift to smartphones from personal computers. Therefore, Internet companies are offering as many services as possible to customers through smartphone applications, which will be a new revenue source. Hence, all major Chinese e-Commerce companies, like Alibaba Group Holding Limited BABA , are currently investing in the space, intensifying competition for Baidu.

In late June, Baidu announced that it would invest $3.2 billion over the next three years to bolster its line-up of O2O by fortifying group-buying website Nuomi. Also, in August, the company invested $100 million in Chinese online laundry firm, Edaixi, to boost its O2O presence.

Guo believes that the aggressive investments by Baidu in this space will definitely boost the top line but negatively impact margins and profitability. Therefore, the analyst lowered non-GAAP EPS estimates to 4.5% and 13.9% for 2015 and 2016, respectively.

However, Guo remains optimistic about Baidu's core search business, which he believes will help Baidu meet revenue estimates in the rest of 2015, despite the recent economic weakness in China. He does not expect advertising revenues to contribute much to the upside.

Baidu provides Internet search services in China. It also offers a Chinese language search platform for businesses to reach customers. Its increasing presence in the online video market provides a distinct competitive edge. We believe that the company's supremacy is driven by its innovations in the mobile search market and huge product portfolio.

Currently, Baidu has a Zacks Rank #3 (Hold). A couple of well-ranked stocks in the same sector are Google Inc. GOOGL and IZEA, Inc. IZEA with a Zacks Rank #2 (Buy).

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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.

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