Baidu's growth story is far from over

Sales at the Chinese search-engine Goliath soared past analyst expectations in the third quarter.

By InvestorPlace Oct 30, 2013 12:07PM
File photo of security guard walking past the company logo of Baidu at its headquarters in Beijing. © Soo Hoo Zheyang/ReutersBy Alyssa Oursler

iplogoChinese search stock Baidu (BIDU) opened to a new all-time high Wednesday morning after reporting third-quarter earnings after the bell Tuesday. Gains have slowed since, but the stock is still up nearly 3% so far Wednesday.


Including the morning's gains, Baidu shares have soared an eye-popping 63% this year -- more than double the still-strong broader market.


Of course, actual earnings weren't the real catalyst for Baidu's climb Wednesday morning. Instead, revenue was they key metric in the report.



The earnings details

Many investors have been worried that young up-and-coming rival Qihoo (QIHU) was stealing Baidu's market share, but third-quarter earnings show Baidu is trekking along just fine.


There are three main details to know about the Baidu earnings report that sent BIDU stock even higher. Take a look:

  • Revenue increased by 42% to RMB 8.89 billion, beating analyst expectations of RMB 8.81 billion. The Baidu CEO also added that "mobile search revenues in particular continued to grow at an exciting pace as more of our customers recognize the benefits of mobile marketing on the Baidu platform."
  • Earnings growth was meager, with net income only expanding 1.3% year-over-year. Still, earnings per share beat analyst expectations -- a nice change of pace considering EPS fell short in two of the four previous quarters.
  • Earnings growth is far behind its sales growth for one simple reason: Baidu is investing in future growth. The company recently reached an agreement with NetDragon Websoft, for example, to buy one of China’s leading mobile app marketplaces. "In the quarters ahead, we will continue to invest aggressively in order to position ourselves well in this rapidly developing mobile market," chief financial officer Jennifer Li said in the Baidu earnings release.

No wonder Baidu investors were smiling.


Another promising sign from the Baidu earnings report was the company's fourth-quarter outlook. Fourth-quarter revenue should be between RMB 9.22 billion and RMB 9.48 billion, which translates to growth of between 46% and 50%.


More importantly, that's far higher than current analyst estimates for the company's fourth-quarter revenue. The consensus heading into the report was for RMB 8.9 billion.


Be cautious with BIDU stock

Still, another solid Baidu earnings report doesn't necessarily mean it's time to go out and snatch up the stock. While Baidu is posting sizzling sales growth, the company is only slated to grow earnings around 21% long-term. . . yet is trading for a whopping 33 times forward earnings.


Sure, Baidu investors have a sentiment similar to Amazon (AMZN) investors right now, where sales growth and big-time potential is more important than the current bottom line.


And sure, the Chinese Internet mega-trend has the potential to keep lifting Chinese Internet stocks across the board higher.


But Baidu shares already have big-time gains in the books, while its sales growth is set to slow down in coming years. Analysts expect 38% growth in 2013, for example, but only 33% for 2014.


So if you believe in Baidu long-term, wait for a decent pullback. And proceed with caution. It's unsure just how long Baidu investors will tolerate meager earnings growth in exchange for huge revenue gains.


As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.


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