Baidu’s video spin-off saves the quarter

Baidu shares jumped after it said it spin-off its video-streaming unit

Baidu’s video spin-off saves the quarter

Investors rethink

The main takeaway for Baidu’s stock following well-received quarterly earnings is that it is now on the verge of trading higher for the year. That indicates investors are re-thinking negative prospects that left the shares as much as 12.5% lower from 2017’s close earlier this month.

Low expectations met

However the market’s reaction has less to do with key fourth-quarter figures and hangs more on news that the web giant will spin-off video streaming unit iQiyi. Q4 revenues of 23.6 billion yuan ($3.72bn) merely met the top end of Baidu’s guidance range—which was far below prior investor expectations. Furthermore, the group’s projected revenue in the current quarter of between 19.86 billion yuan and 20.97 billion yuan was again below analyst consensus.

A big deal

All this ought to shift attention to the group’s confirmation that Netflix-like iQiyi will be coming to the market. It’s a big deal. With a market valuation of at least $8bn, setting a value for iQiyi could 1. Increase funding for the cash-burning battles that iQiyi, China’s leading video-streaming service, is obliged to engage in 2. Buy time for Baidu’s core strategies, like AI, to work and 3. Enable the market to value Baidu more fairly. Note Baidu’s forward price/earnings rating consistently lags those of its Chinese rivals.

iQiyi pressure

The need for a spin-out was underlined by heavy margin pressure from iQiyi in Q4.  Baidu’s group operating margin would have been a third higher if iQiyi was already standalone. And net income rose just 1% on a GAAP basis to $639m. There are also signs that iQiyi has drained internal focus on core activities. Active online marketing customers only increased 2% on the year in Q4, though revenue per customer rose 25%.

Low-flying BAT stock

Whilst welcome, the iQiyi news does not solve Baidu’s growth conundrum. With compound annual revenue growth rate of 20% over three-years, Baidu trails the average of rivals like Tencent and Alibaba by more than 20 percentage points. Competition and changing trends are showing. Having pulled two rabbits out of the hat over the last two quarters (in Q3 Baidu sold its delivery business) at some point the company must grow organically. If not, regardless of Thursday’s stock recovery it faces another year as the lowest-flying BAT stock.

Thoughts on Baidu’s technical chart

The stock has vaulted on Wednesday, creating a large gap and a doji candle. At the very least we can surmise a high probability that the gap will be filled in the very near term. More positively, the jump has cleared key $225.5 resistance that was formerly support throughout the last quarter of 2017. Consolidation has a good chance of respecting the $225.5 floor, even if shorter-term support at $232.4 gives way. We’re still concerned that October-November’s “unhelpful fractal” could recur. During that time, new up legs from the $225.5-$232.4 support range failed to last. First signs of a repeat would be any wilting near $253, currently resistance and formerly higher support in the autumn.

Baidu Inc. (ADS) share price chart – daily intervals

Source: Thomson Reuters and City Index

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.