Baidu buyers may need to bide their time

Baidu investors hope fourth-quarter earnings can push the shares ahead of the ‘BAT’ pack, but may need to bide their time.

Upswing hopes for BAT

Together with gargantuan web rivals Alibaba and Tencent, Baidu shed multibillion dollars of value during the recent market sell-off, and turned red for the year. To be sure, that comes after chunky share price gains  in 2017. Baidu’s 42% rise was amongst the more modest. And, in theory, with Baidu on a forecast-beating streak that’s lasted at least four quarters, including a 156% profit leap in Q3, chances of a positive surprise on Tuesday look good. Unfortunately, last quarter’s bottom line boost didn’t save the stock from its biggest one-day tumble since July 2015.

‘Respectful’ sales

For one reason, Baidu’s 7.9 billion yuan net income was less impressive excluding proceeds from the sale of its food delivery business. More importantly, the group forecast lighter than expected revenue for the last quarter of 2017. Furthermore, its explanation for weak top-line guidance seemed to irritate investors. It blamed the timing of the Communist Party Congress in October for lost advertising sales, saying it had scaled back marketing “to show respect”. The market reaction had a punitive edge, with shares tumbling 8% in U.S. trading. Investors seemed sceptical about the ‘congress’ explanation. Indeed, whilst active advertising customers rose 3% quarter-on-quarter to 486,000, that was still 7% lower than the year before. Baidu said it expected fourth-quarter revenue to rise 22%-29% year-on-year to between $3.34bn and $3.52bn. That compared with the 36% bump Wall Street expected. Consensus for earnings per share is currently $2.27.

Scrutiny

Q3 results showed Baidu was still getting to grips with tougher rules for Chinese digital media firms. These partly stemmed from the death of a student in 2016 that was linked by authorities to healthcare advertising carried by Baidu. That led to a public outcry and tougher regulations. And in September, steep penalties were levelled against the $75bn group for failing to remove fake news and content the Communist Party deemed offensive.

Slow learning

Baidu’s response has been to refocus around its core search franchise, hence the food delivery disposal and exit from mobile gaming in favour of a big push into AI. Such efforts are beginning to show traction. For instance intelligent filtering lifted search landing page results above 90% in Q3 from 40% at the beginning of 2017. However, exponential revenue growth is taking longer to materialise. Additionally, competition on Baidu’s own platforms is increasing, whilst expenses for ramping AI-driven search have also begun to worry investors, though other spending is being slashed.

Sharply lowered expectations could yet boost Baidu shares, particularly if Q4 revenues or profits beat forecasts again. But that didn’t work last quarter. And the stellar outcome investors would like to see from a renewed focus on search is unlikely to show up so soon.

Technical chart thoughts

The rebound of Baidu shares in step with global indices has provided a swing back to the closely watched 200-day moving average (MA), but it is worth noting the stock stayed below it on Monday. Baidu needs to get above it to restore optimum confidence in the bull case. Still, the optimistic view is also aided by Baidu’s breakout from a short-term descending channel running between end-January and early February. More negatively, even if the stock breaches the 200-day MA, it will face confirmed support that was formerly resistance at $225.5. Additionally, whilst the Relative Strength Index (RSI; see sub-chart) is rallying with price, a recent ‘unhelpful’ momentum fractal could disappoint if repeated in the near term. (See blue ellipse on RSI sub-chart). We refer to a similar October-November RSI rally that fizzled out. That accompanied a weak bounce by price, far short of key resistance at $265.5. $208.8, the kick off point of a bullish late-July reversal and of Monday’s bounce, ought to provide support, but the key to extend upside is a break of $225.5.

Baidu Inc. ADS share price chart – daily intervals

Source: Thomson Reuters and City Index