INTERNET: BAT Busy In Earnings, Hiring, Acquiring

Bottom line: Baidu could be entering a period of profit erosion that will put pressure on its stock, while Tencent’s latest investment hints it could be preparing to roll out a global gaming platform by the end of this year.

Baidu profit drops

China’s Internet “Big 3” of Baidu (Nasdaq: BIDU), Alibaba (NYSE: BABA) and Tencent (HKEx: 700) are often in the news on any given week, but we’re seeing a rare instance where all 3 are in the headlines on this final work day before the May 1 break. Baidu is leading off the BAT headlines with the release of its latest quarterly earnings that are led by a rare profit decline due to soaring expenses.

Rising costs may have also been a factor in the Alibaba news, which has the company freezing its global headcount for the rest of the year as it tries to rationalize itself after a period a breakneck growth. Last but not least is Tencent, whose relatively large purchase of a stake in a US gaming firm hints at the direction it will take in its overseas expansion.

All 3 of these stories are significant and could justify a full posting and discussion. But since time and space are limited we’ll just give a brief discussion for all 3, starting with the rare development that saw Baidu’s operating and net profits fall 9 percent and 3 percent in its latest reporting quarter. (company announcement) That contrasts sharply with other recent quarters, where profits typically  grew by 20-40 percent. The shift certainly doesn’t bode well for Baidu’s stock if the profit erosion becomes a longer term trend.

Baidu’s stock fell 2.6 percent after the results came out, but it’s still trading near a 2 month high. Soaring costs were the main culprit behind the profit erosion, with R&D expenses rising at a particularly fast rate of nearly 80 percent — far faster than the company’s revenue growth of 34 percent. Baidu has said for quite a while that it’s investing in a future where mobile could overtake traditional desktop search, which probably explains the big jump in R&D costs. Still, this kind of profit erosion won’t look too appealing if it persists over the short term, which could pressure on Baidu’s stock.

Next let’s look at Alibaba, which says it is freezing its workforce at current levels for the rest of this year as it aims to become more efficient following a recent period of rapid growth. (English article) The company currently has a sizable 30,000 employees, which is quite large but certainly not out of control. The bigger problem is the way many of these employees have come to Alibaba, often through its wide range of acquisitions over the last 2 years.

Alibaba founder Jack Ma made his announcement in a speech whose transcript was posted on the company’s Laiwang messaging service, saying the company’s current headcount will remain at 30,000 for the rest of this year. New people will still be hired to replace leaving ones, but the total figure will remain constant.

This kind of action seems quite reasonable and probably should have been taken a year ago, in a bid to rationalize the company following its many acquisitions and organic growth in existing departments. We’ll have to see how the program develops, but ideally Alibaba will end up with a more efficient, better organized structure that allows employees and investors to see exactly how its many pieces fit together.

Last let’s take a quick look at the Tencent news, which has the company paying $126 million for 14.6 of Glu Mobile (Nasdaq: GLUU), a US mobile game developer. (English article) Of the 3 BAT companies, Tencent has been the most intent on targeting western markets for its global expansion, unlike Alibaba and Baidu, which appear more focused on emerging markets like India and Brazil.

Gossip earlier this year said that Tencent was preparing to launch a global gaming product soon, following a failed $300 million campaign to boost its wildly popular WeChat mobile messaging service outside China. This latest acquisition and other recent investments in companies like Activision Blizzard (Nasdaq: ATVI) would certainly be consistent with that strategy, meaning that perhaps we really will see the roll-out of such a global gaming platform by the end of this year.

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