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Bear of the Day: Baidu (BIDU)

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Baidu ( BIDU ) is a Chinese-language Internet search provider that offers online marketing services to its customers directly and through other distribution networks. The company offers Japanese search services as well, including Web search, image search, video search, and blog search capabilities. The Beijing based company is now a Zacks Rank #5 (Strong Sell) after recent EPS and negative news.

The company has a market cap of $57 Billion and has a Forward PE of 29. The stock has Zacks Style Scores of "A" in Growth and Momentum, but "D" in Value. Investors have been impressed by how fast the company has been growing since becoming public in 2005 and revenue growth has always been the driver of the stock price. However, that growth is starting to come into question as long term estimates are falling and recent negative news has the company in hot water.

Earnings

Q1 earnings came in at $1.06 verse the $0.78 expected. The company guided Q2 revenue $3.12-3.19 Billion verse the $2.84 Billion expected. The numbers were solid and the stock surged 8% higher on the news. However, a week after earnings Chinese regulators announced they would investigate the company, causing the stock to fall 14% over the next couple days.

Chinese Regulatory Issues

The Cyberspace Administration of China and the National Health and Family Planning Commission announced they would investigate compliance over paid prominent listings with Baidu internet searches. A Chinese student reportedly died from cancer after a high ranking Baidu search sent him to a misleading form of treatment. Before dying, the student complaints went viral causing uproar amongst Chinese internet public.

Chinese regulators are now expected to clamp down on healthcare advertisements such as the one the student fell for. The problem for Baidu is that healthcare advertisements are 20-30% of total search revenue. If this goes away Baidu growth will stumble and analysts are reducing price targets and lowering long term estimates.

Since the news price targets have been lowered at the following firms:

Deutshce Bank: Cut from $226 to $209

Oppenheimer: Cut from $240 to $225

Morgan Stanley: Cut from $230 to $200

Estimates

While estimates are seen higher for next quarter, long term estimates have been falling. For fiscal year 2016, estimates have fallen 7% over the last 90 days. For 2017, estimates have been revised 16% lower from $9.78 to $8.17.

When you add falling estimates and the risk of Chinese regulation you get a stock that should be avoided possibly shorted.

A Better option

Facebook ( FB ) is the popular social networking site that is Zacks Rank #1 (Strong Buy) and a much better option than Baidu. A big positive for Facebook in comparison to Baidu is that there is no Chinese Regulators to mess with at the moment. In fact, if Facebook was ever allowed into China (currently blocked) that would open up a whole new stream of users.

Over the last month the company has seen estimates move 16% higher for fiscal year 2016. Over the last 90 days estimates for 2017 have been revised 14% higher, from $3.34 to $3.81.

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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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