Personal Finance

Keep Calm and Buy Baidu's Post-Earnings Dip

Baidu's mobile app.

Shares of Baidu (NASDAQ: BIDU) recently fell after the company posted mixed third quarter earnings and guidance that missed analyst expectations. However, there was also a lot of confusion about Baidu's numbers -- the sales miss was minor, and many media reports misunderstood or ignored the reasons for the lower sales guidance. Let's take a look at what happened, and why Baidu's dip actually represents a great buying opportunity for investors.

Its strongest sales growth in five quarters

Baidu's revenue rose 29% annually to 23.5 billion yuan ($3.53 billion) during the quarter, representing its strongest year-over-year growth in five quarters. However, analysts had been expecting slightly higher revenues of 23.6 billion ($3.56 billion).

Baidu's mobile app.

Image source: iTunes.

Yet Baidu's key businesses were firing on all cylinders. Online marketing revenues rose 22% annually to 20.1 billion yuan ($3.02 billion). Its number of active online marketing customers slipped 7% annually to 486,000 (up 3% sequentially), but that slight decline was easily offset by a 31% annual jump in revenues per online customer -- which hit 40,900 yuan ($6,147) during the quarter.

73% of Baidu's revenues came from mobile platforms during the quarter, up from 64% a year ago. Daily and monthly active users on Mobile Baidu rose 2% annually, while daily time spent on the app rose 15% sequentially. Its video platform iQiyi reached 78 million and 160 million daily active users on PC and mobile devices respectively, with total minutes spent on the platform surging almost 30% annually.

On the bottom line, Baidu's non-GAAP net income rose 163% annually to 9.1 billion yuan ($1.36 billion), or $3.89 per ADS -- which crushed expectations by $1.85 per share. Its GAAP-adjusted net income rose 156% to 7.9 billion yuan ($1.2 billion).

All these figures indicate that Baidu's core business remains healthy, and fears about a slowdown or Tencent 's (NASDAQOTH: TCEHY) WeChat ecosystem disrupting Baidu's market are overblown.

But then the media missed the conference call...

Baidu's minor top line miss wasn't the main reason the stock fell -- it was the company's guidance for the fourth quarter. The company expects its sales to hit 22.2 billion to 23.4 billion yuan ($3.35-$3.53 billion) for the quarter, which represents 22%-29% year-over-year growth. Analysts had been expecting about 36% growth.

That miss looks bad, but many media outlets didn't explain the reasons for the lower guidance, which were revealed during the conference call. The first reason was the divestments of its food delivery service, Baidu Deliveries, and the discontinuation of some mobile games. Those businesses were unloaded to streamline Baidu's core business and enable it to invest more heavily in next-gen technologies like AI, smart devices, and driverless cars to counter ecosystem rivals like Tencent.

iQiyi's iPad app.

iQiyi's iPad app. Image source: iTunes.

iQiyi's iPad app.

The second big impact was the 19th National Congress of the Communist Party of China, which met between Oct. 18 and 24. To show its "respect" during these televised broadcasts, iQiyi "adopted a self-restriction to not show hot series" -- which will temporarily reduce the platform's revenues by about 700 million yuan ($106 million) sequentially.

Baidu states that if those impacts are excluded, its third quarter revenues would have risen 26% annually (vs. the reported 29%), and its fourth quarter revenues would grow 25%-34%. That growth would still miss analyst expectations, but it indicates that the growth of Baidu's core business is still accelerating .

Be greedy when others are fearful...

In this context, the sell-off of Baidu -- which knocked the stock down about 13% from its all-time highs -- clearly represents a buying opportunity instead of a selling one. Baidu is generating double-digit sales growth and triple-digit earnings growth, yet still trades at just 28 times next year's earnings.

Baidu still controls about 80% of China's search market, making it one of the safest plays on China's growing economy, rising middle class, and higher Internet penetration rates. Therefore, I believe that the current misunderstandings about Baidu make it a great long-term buy at current prices.

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Leo Sun owns shares of Baidu and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu. 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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