Friday, 17 May 2024

Why Baidu Stock Dropped After Earnings

by BD Banks

Shares of Baidu (NASDAQ: BIDU) stock slumped as much as 5.5% this morning, despite beating earnings estimates in its first-quarter 2024 report. Analysts forecast the Chinese internet search giant would earn $2.18 per American depositary share (ADS), adjusted for one-time items, on $4.3 billion in revenue, but Baidu actually earned $2.76 per ADS on sales of $4.4 billion.

As of 10:55 a.m. ET, Baidu is clawing back its losses, but still down about 1%. Is that fair?

Should investors be selling Baidu stock?

Actually, yes, it is fair. Although Baidu beat analyst forecasts for pro forma earnings, the company’s earnings as calculated according to generally accepted accounting principles (GAAP) fell substantially below the pro forma number — and below the analyst forecast as well — only $2.06 per share. These earnings also declined 6% year over year.

Sales, which also beat estimates, grew only 1%.

So it wasn’t a great report. The best Baidu was able to say about its business was that online marketing revenue grew 3% and artificial intelligence (AI) cloud revenue rose 6%. (The thing dragging on growth was Baidu’s iQIYI streaming video business, which shrank 5%.)

Or is Baidu stock a buy?

In short, there were reasons for investors to be selling Baidu stock today. But what about buying Baidu? Is there an argument for that as well?

Well of course there is! By definition, anytime one investor sells a stock, another investor is buying it. And from a buyer’s perspective, you could argue that Baidu, China’s most popular search engine, looks cheap at 14.5 times earnings and less than 11 times trailing free cash flow. If Baidu stock completes its turnaround and goes on to grow earnings at 10% annually over the next five years, as analysts polled by S&P Global Market Intelligence think it will, you could argue Baidu stock looks almost cheap enough to buy today.

That’s if Baidu grows at 10%. For now, with earnings shrinking and sales growing hardly at all, I remain of the opinion that Baidu stock is a sell.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Baidu. The Motley Fool has a disclosure policy.