The dominant search engine company of China - Baidu ( BIDU ) - released mixed fourth-quarter results after the market closed on February 11. While the company beat our revenue estimate, the earnings miss dampened investors' mood and weighed on the stock price. Shares of BIDU tumbled as much as 9.2% on more than three times volume than normal. A weaker-than-expected revenue outlook also played a role in dragging down the share price.
Q4 in Detail
The Beijing-based company's fourth-quarter 2014 earnings per share of $1.45 fell short of the Zacks Consensus Estimate of $1.60 by 9.4% but improved from the year-ago earnings by 12.4%. Total revenue of $2.26 billion surged 47.5% year over year exceeding the Zacks Consensus Estimate of $2.22 billion helped by a 46.3% rise in online marketing revenues. Baidu generated as much as 42% of its revenues from mobile-oriented product and services in the reported quarter, up from 36% in the third quarter.
Operating profit grew only 7.8% as a boost to promotional investment for mobile products and services ate up much of the benefits derived from revenue growth and lower bandwidth and depreciation cost in proportion to revenues. Also, as a percentage of revenues, traffic acquisition costs and content costs went up year over year in the quarter.
The outlook was unenthusiastic too. Baidu anticipates total revenue for Q1 of 2015 to range between $2.038 billion and $2.106 billion. The projected revenue will likely register a year-over-year expansion of 33.2−37.6%. The projected revenue missed analysts' estimates.
Quite expectedly, Baidu's downbeat results and guidance stoked pessimism among investors as the stock traded in the red post earnings. The stock retreated about 9.2% in the after-market session while it was down 2.2% at close on the February 11 trading session, indicating that investors did not have high hopes on Baidu. Investors should also note that Baidu fell about 5.8% so far this year (as of February 11).
Baidu has a sizable exposure (at least over 8.0%) in many Internet and China-based funds like CSI China Five Year Plan ETF ( KFYP ), China Technology ETF ( CQQQ ), CSI China Internet ETF ( KWEB ), NASDAQ China Technology ETF ( QQQC ) and Golden Dragon Halter USX China Portfolio ( PGJ ).
This suggests that the performance of these funds is highly dependent on Baidu. As a result, the above-mentioned ETFs could pare gains and fall out of investors' choice in the coming days. Below, we have highlighted three funds that have big exposure to Baidu:
KFYP in Focus
KFYP tracks the CSI Overseas China Five-Year Plan Index and holds 224 stocks in its basket. The stock under review, Baidu, occupies the second position in the basket with 12.87% of assets. The fund charges 68 bps in fees.
About half of the portfolio is skewed toward the Technology sector. KFYP has lost about 0.7% in the year-to-date frame (as of February 11, 2015) (read: Alibaba Misses Revenues: Good or Bad for These ETFs? ).
CQQQ in Focus
The fund looks to track the AlphaShares China Technology Index. Here also, the in-focus Baidu takes the second spot in its 78-security basket with an 8.30% share. Notably, China accounts for about 55% share of this ETF. The fund charges 70 bps in fees. CQQQ was up about 4% year to date (read: New ETF Debuts to Unlock Emerging Market eCommerce Space ).
KWEB in Focus
This China Internet ETF holds a basket of 53 stocks, giving exposure to a variety of industries in the Technology space. Baidu holds the fourth position with about 7.58% exposure. The fund has gained about 1.7% in the year-to-date frame (as of February 11, 2015).
While the present situation of Baidu looks unimpressive, investors with strong stomach for risks can use this dip as an entry point. The broader Internet services industry which BIDU hails from falls in the top 37% section of Zacks Industry Ranks. However, to do so, a basket approach is reasonable to alleviate company-specific risks.
Baidu has been investing heavily to build a position in the mobile and video segments. While this transition phase slows down the company's wining momentum, we believe Baidu is approaching its brighter days. This is especially true given China's inclination toward easy money policies (read: Policy Easing Puts China ETFs in Focus ).
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