Shares of Chinese search engine Baidu Inc. BIDU have continued to tumble since the company announced its most recent quarterly results on May 16.
The stock is currently down by more than 26% since releasing its first-quarter earnings. Based on the current trajectory, it looks like it has not reached the bottom yet for a rebound.
The Beijing-based company’s stock fell 1.5% on Thursday, adding to the declines witnessed over the last two weeks. Much of Baidu’s current woes are attributed to its weakening core business, which again posted dismal growth in the most recent quarter.
The company could be positioning for a major revamp, however, which could trigger the next growth phase. While its core business continues to experience pressure, Baidu has been making strides in other areas that could be key to taking it to the next level.
When you look at its closest peer on the other side of the planet, Alphabet Inc.’s GOOG GOOGL Google, the search engine space has been attracting more players that are taking unique approaches to disrupting the market.
For search engines, revenue comes from digital advertising. Based on developments over the last several years, Google’s market share has continued to contract. The search engine faces stiff competition from Facebook Inc. FB, while Amazon.com Inc. AMZN has also joined the fray with its search advertising network.
In the case of Baidu, the competition is not as fierce. It still commands a market share of about 70% in China. In fact, despite the weakness in its core business, the company still managed to post a 15% increase in revenue from the prior-year quarter.Â
But the company's intensive sales and marketing campaign during the 2019 CCTV Chinese New Year Gala (Chunwan) affected its margins. Reports indicate Chunwan is the most viewed TV program in the world. It is dubbed China’s Super Bowl for advertisers.
Baidu’s expensive marketing campaign saw its margins for the quarter fall significantly. Its non-GAAP operating margin was down to just 2% from 26% in the previous period.
While the company did not disclose how much it spent to become the main sponsor of the event, estimates are in the high $40 million range. Alibaba Group Holding Ltd. (BABA)Â spent $44.5 million in 2017 and 2018 to be the main sponsor of the event.
Baidu’s traffic acquisition costs increased 41% to $474 million during the quarter, while costs related to its investment in iQiyi IQ drove content acquisition costs up 47% to $917 million.
In general, Baidu’s performance was affected by a significant increase in costs. Regardless, the company could reap the benefits in the coming years with its investment in iQiyi, where it aims to capitalize on the rapid growth of video streaming.
Known as the Chinese equivalent of Netflix NFLX, iQiyi added 9.4 million users in the most recent quarter, bringing its total to 96.8 million users. This puts the company in a strong position to boost growth once it begins to net profits. With the number of internet users continuing to grow, it could soon overtake Netflix in terms of global subscriptions.
Baidu will also benefit from the ongoing U.S.-China trade tensions, which will continue to keep Google from re-entering the Chinese market. As such, while Baidu’s short-term problems are clear, there is a chance to buy the shares while they are still down because the next growth phase could be massive.
Disclosure: No position in the stocks mentioned.
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