Mission accomplished for Baidu on both fronts

The Chinese Internet company is finding ways to rein in expenses -- and beat Wall Street profit projections to boot.

By Jim J. Jubak Oct 31, 2011 6:17PM
What’s this? An Internet company reports massive growth -- and says costs are under control.

It’s even more impressive when these results come from a Chinese Internet company, since the sector isn’t exactly known for tight controls on expenses.

Baidu (BIDU), the runaway leader in China’s search market, reported earnings of 86 cents a share Friday, beating the Wall Street consensus projection by 3 cents a share. Operating profit in the quarter climbed to $349 million, an 88% increase from the third quarter of 2010.

Revenue climbed to $654.7 million, an 85% jump from the third quarter of 2010 and well above the Wall Street consensus of $623 million. (Baidu has been a member of my long-term Jubak Picks 50 portfolio since January 2011.)

Post continues below.
The number of companies advertising on Baidu climbed in the quarter, and so did their average spending. The number of active advertisers rose by 112% as the company added 6,000 new advertisers to its existing base of 304,000. Average revenue per advertising customer climbed 66%.

Costs were, for the most part, under control. Selling, general, and administrative expenses did climb by 55% to $72 million in the quarter, as the company beefed up marketing of new services such as its recently acquired Qunar online travel site and its Qiyi online video service, and added new features such as a personalized home page for users.

But the all important (for an Internet search company) traffic-acquisition cost fell to 8% of total revenue, from 8.9% in the third quarter of 2010. Bandwidth cost rose modestly to 4% of total revenue, from 3.8% in the third quarter of 2010.

Baidu substantially raised its guidance for the fourth quarter to revenue of $695 million to $711 million (compared to the $649 million Wall Street consensus.) That would represent a 79% to 85% year-to-year increase in revenue.

Baidu’s share price has swung through a wide range in the last year, from a 52-week high of $165.96 to a 52-week low of $94.33. On these results and the fourth-quarter guidance, I expect Baidu to challenge the top of that range within the next two quarters (especially because China’s stock market in general looks like it’s throwing off its malaise.)

For the last year, it’s been an extremely profitable trade to buy whenever the stock nears $120 and hold for gains above $145. I think this time around, holding as the stock runs above today’s price of $141 and change toward that 52-week high is warranted.

If you’re a long-term investor in Baidu, my suggestion is to add positions near the bottom of the range, and to hold through the volatility.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Baidu as of the end of June. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

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