EUR 850.00 For Business Accounts Only

Morningstar | Baidu Will See Slowdown in Near Term but Is Undervalued for Long-Term Investors

Baidu's revenue guidance of CNY 25.5 billion-26.7 billion for the fourth quarter implies 15%-20% year-over-year growth, lower than our previous forecast of 29%. The implied fourth-quarter guidance for Baidu's core business is only 7%-13% growth on a year-over-year basis, versus 25% in the third quarter. We think macro and regulatory headwinds are the reasons for more conservative-than-expected guidance. We expect weak consumer sentiment and a slowing economy to reduce advertising revenue for Baidu. However, we think the wide-moat company has a strong network effect that will allow it to weather the storm in the long run. We maintain our fair value estimate at $322 per share after third-quarter results and think Baidu is undervalued.

Revenue excluding divestitures in the quarter was up 27% year over year, at the lower end of the guidance for 26%-33%. Non-GAAP operating margin was 20% compared with 25% for the third quarter of 2017, mainly due to the sharp increase in content costs and selling, general, and administrative expenses that were previously guided by management. There was a 73% increase in content costs for iQIYI and increased investment in BJH accounts, Baidu feeds' content network in the quarter. Selling, general, and administrative expenses in the quarter were up 51% year over year, driven by higher investment in channel and promotional marketing.

In September, average daily active users of Baidu App reached 151 million, up 19% year over year, and time spent on feeds grew 68% year over year, which is encouraging. Excluding overlaps, monthly active users of Baidu’s family of apps reached 990 million in September, a 28% increase year over year, which is a testimonial to our wide moat rating. Ad revenue per online marketing customers was up 12% year over year on the back of a 7% increase in active online marketing customers, an indication of price-setting power.

IQIYI’s third-quarter revenue was up 48% year over year while paying subscribers grew an impressive 20% compared with a quarter ago. IQIYI’s operating margin was negative 37.5% in the quarter as a result of content costs and marketing.