Baidu earnings rebound buys time for search giant to find new center for future profits

Source:Global Times Published: 2017/7/31 21:08:39

On Thursday, the Chinese Web giant Baidu reported a forecast-beating jump in quarterly earnings, suggesting its core search business is rebounding. This gives Baidu more room to focus on mobile services and artificial intelligence.

Earnings jumped 83 percent year-on-year to 4.4 billion yuan ($651 million) in the three months to June. That was 52 percent ahead of the mean average analyst polled by Thomson Reuters. The shares rose 6.9 percent in after-hours trading.

This follows a difficult patch. Last year a student died after undergoing an experimental cancer treatment he found on Baidu search. Baidu was then forced to drop lucrative healthcare-advertising customers. Before that, it had stumbled into a cash-burning subsidy war with bigger rivals Alibaba and Tencent in "online-to-offline" businesses such as taxi hailing, food delivery and movie tickets.

Since then, Baidu has been shifting away from O2O. This, and cuts to operating expenses, helped drive earnings this quarter, say China Renaissance analysts. It has also shrunk its base of search-advertising clients.

Encouragingly, mobile revenue made up 72 percent of total sales in the quarter, up from 62 percent a year earlier. Advertising sales from a nascent news feed, which uses AI to tailor content, has helped. Baidu says daily active users topped 100 million this month, up from 83 million in April and outpacing rivals. This is welcome, given that Baidu was slower to adapt to the smartphone era than rivals.

Its future in AI is more distant. Baidu's near-monopoly in Chinese search offers a treasure trove of data that should be an advantage. Its vision of self-driving cars and speakers that can interact with humans is exciting. But it will be years before many of these ventures ever pay off, and the benefits to shareholders are unclear.

Still, the financial results are moving in the right direction. And investors seem inclined to give Baidu the benefit of the doubt. Even before the latest bounce, Thursday's closing stock price equated to 28.7 times forward earnings. That is ahead of a five-year average of slightly less than 25 times, Datastream shows. Baidu can keep searching for future profits.

The author is Alec Macfarlane, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews.

Posted in: INSIDER'S EYE

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