EUR 850.00 For Business Accounts Only

Morningstar | Baidu’s FVE Maintained at USD 262; Heavy Investment Pressured Margins

Year-over-year net revenue growth at wide-moat Baidu in the fourth quarter was 22%, beating our expectations of 15% and the top end of guidance of 20%. It was helped by iQiyi’s 55% year-over-year revenue growth, higher than the top end of its guidance of 49%. Revenue from Baidu Core increased 14% year over year, close to the implied top end of guidance of 15%. We see weaker advertising demand as Baidu Core revenue in the quarter was down sequentially by 5% and iQiyi revenue was up only by 2% sequentially, the latter was dragged by an 8% sequential decline in online advertising revenue. The implied Baidu Core’s first-quarter revenue guidance is CNY 16.7 billion to CNY 17.6 billion, 4% to 10% year-over-year gain or 12% to 18% excluding divestitures on our estimates. iQiyi’s net revenue first-quarter guidance is between CNY 6.80 billion and CNY 7.10 billion, representing a 40% to 46% year-over-year increase and still in line with the growth in the fourth quarter. Our 2019 Baidu Core revenue growth assumption is 3.3% and 36% for iQiyi. Growth will come from expanding of advertising products such as optimized cost per impression and optimized cost per video view, mini programs, and healthcare ads. We are maintaining our fair value estimate at USD 262.

Marketing customers grew over 15% year over year in the quarter, mainly helped by performance-based app products such as optimized cost per click/views/impressions and verticals such as education, e-commerce, retail, and service verticals. Revenue per online marketing customer was down 4% year over year, due to change in industry mix and different pricing across industries due to industry environment.

Non-GAAP operating margin in the quarter was 9.8%, a substantial decline from 20.1% in the third quarter due to expenses in content, research and development, traffic acquisition, and sales and marketing for promoting Baidu’s family of apps. Baidu core’s non-GAAP operating margin was 28.0% in the quarter versus 37.3% in the third quarter, while iQiyi’s non-GAAP operating margin was negative 44% in the quarter versus negative 35% in the prior quarter.

Management will continue to invest in promoting Baidu App, Haokan, and Quanmin, given good return on investment of the promotion. Baidu App daily active users reached 161 million in December 2018, 7% higher than September, which was decent in our view. Increasing usage of Baidu App can not only drive search but also the feeds business and mini programs. Baidu Smart Mini Program monthly active user, or MAU, base was 147 million in December 2018, up 30% sequentially. Initial testing shows that mini programs deliver higher return on investment for customers versus HTML5 websites. According to Questmobile, Haokan and Quanmin ranked number 5 and 9 in the short video apps in terms of MAUs in December, which is quite promising. However, there is still a big discrepancy between the MAUs of the top-ranked short video app Douyin (426 million), Haokan (75 million), and Quanmin (23 million). Other areas of investments include DuerOS and cloud. The cloud business generated CNY 1.1 billion in revenue in the fourth quarter, more than doubling from last year.

QIYI’s subscribers reached 87.4 million at year-end, 8% higher than September, which pales in comparison to the sequential growth of 20% in the third quarter. And 98.5% of the subscribers are paying members at the year-end.