The more problematic aspect of Baidu’s report was its guidance for the quarter, which it will report on after Monday’s market close. Baidu’s targeting revenue to climb 38% to 42% over the prior year’s fourth quarter — and that’s not only short of the 46% Wall Street was expecting, but it also implies a sequential decline.
Baidu wasn’t the only dot-com speedster to issue guidance calling for a sequential dip in revenue during the fourth quarter. Renren Inc (NYSE:RENN), China’s most popular social-networking website operator, also braced investors for a revenue decline between the third and fourth quarters. SINA Corp (NASDAQ:SINA)‘s November outlook of $132 million to $136 million in revenue for the quarter is a sharp drop from the $147.7 million it reported during Q3.
Clearly, there’s a seasonality aspect at play here, but this wasn’t really a problem when the companies were growing so quickly in previous years.
In that sense, Baidu’s the lucky one. Renren isn’t expected to be profitable until 2015 at the earliest. SINA, investing heavily to grow its wildly popular SINA Weibo microblogging platform, has posted seven consecutive quarters of year-over-year declines in profitability.
Baidu is still very profitable and building on it. The problem is that growth is decelerating at the company that commands roughly two-thirds of the search queries in China.
Into the pit
Baidu is still growing at a clip that would make stateside dot-coms envious. Analysts see earnings climbing 40% to $1.29 a share in Monday’s report. The smart money has to say Baidu will land just north of that target, bumping its streak of bottom-line beats to 15 consecutive quarters.
However, Baidu was growing faster before, and it will slow down in the future. Unless Baidu nudges the pros higher, Wall Street’s betting on earnings and revenue to climb 24% and 35%, respectively, in 2013.
That’s not bad on its own, and Baidu also happens to be trading at a reasonable 18 times this new year’s projected net income. That holds up favorably to Google Inc (NASDAQ:GOOG) , which hit an all-time high on Friday. The world’s largest online company trades at just 15 times this year’s forecasted profitability, but it’s also growing a lot slower than Baidu. Analysts see earnings and revenue climbing 17% and 15%, respectively, this year.
In short, Baidu may not be the speed demon it was in the past, but it is trading at a discount to its growth rate.
The surprising challenger
Baidu closed at $113.84 before reporting its poorly received third-quarter financials. The stock dropped as low as $85.96 by early December, but it has nearly clawed all the way back now. A strong report on Monday can naturally propel the stock above that mark, but a stinker could send the shares spiraling back into the double digits.
There’s more uncertainty than usual this time because we don’t know the kind of damage that Qihoo 360 Technology Co Ltd (NYSE:QIHU)‘s search engine has done to Baidu. Qihoo 360 was a surprising player. The company is best known for its Web browser and online security software, but it turned heads when it replaced Google with a homegrown solution for search this past summer. The novel engine and its initial lack of monetization attracted users. Within a few months, third-party trackers had Qihoo 360’s engine claiming 10% to 15% of China’s search market.
Clearly, there’s room for more than one search provider. Google rarely enjoys the kind of market dominance that Baidu has in China, and it’s a money machine. However, until Qihoo 360’s search initiatives settle — and investors get a clear snapshot of where Baidu’s market position and earnings potential lie — question marks will remain.
Some answers may come on Monday. It will be the first full quarter that Qihoo 360’s search engine was competing with Baidu, and the market will be able to weigh Baidu’s performance against its October guidance to see if the fundamentals are improving or deteriorating.
The latest economic news out of China has been encouraging. Threats that the world’s most populous nation will crack down on Internet usage also appear to be overblown. Bloomberg reported this weekend that Baidu CEO Robin Li, China’s third wealthiest person, has been named to the country’s top political advisory body. There’s validation in that appointment.
Investors are now hoping that even more validation will arrive on Monday night.
The article Baidu Braces for Manic Monday originally appeared on Fool.com and is written by Rick Aristotle Munarriz.
Longtime Fool contributor Rick Aristotle Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google, and SINA and owns shares of Baidu and Google.
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