INTERNET: Loss Shakes Baidu to the Core

Bottom line: Baidu’s first-ever loss since going public reflects a long-anticipated decline for its core search business, which could mark the start of a longer-term decline due to lack of a strong new business lines.

Baidu in search of search replacement

It seems that profits are increasingly hard to come by these days on China’s Internet. That’s the major takeaway coming in the latest results from search giant Baidu (Nasdaq: BIDU), which has just posted its first loss since becoming a publicly listed company 14 years ago. Perhaps most worrisome, the biggest issue appears to lie in Baidu’s core search business, always a cash cow in the past, whose operating profits tumbled in the first three months of the year.

The surprise loss is one of the first-ever that I can recall for China’s three largest Internet companies or the BAT, namely Baidu, Alibaba (NYSE: BABA) and Tencent (HKEx: 700). That’s led many to wonder whether Baidu’s glory days are fast fading into the rear-view mirror, or whether perhaps this company has another trick pony beyond its search business that has sustained it for years.

I would probably fall into the camp that says this is a company on the cusp of a prolonged sunset, and that this particular quarterly loss perhaps could go down as a watershed in its history. More on that shortly.

First let’s start with the somewhat shocker headline that saw Baidu post its first loss since going public in 2005. (English article) That loss totaled 327 million yuan ($47 million), to be precise. But people were clearly focused on the actual fact that such a profitable company in the past could post a loss at all. Shareholders fled Baidu in droves after the report came out, causing the stock to slump by more than 16 percent.

The sell-off brought Baidu’s market cap down to a very humble $45 billion, only about $2 billion ahead of No. 2 e-commerce player (Nasdaq: JD), which has been nipping at Baidu’s heels for quite sometime as the pair jockey for title as China third largest internet company. JD is also a loss-making colossus, though investors are also starting to get impatient with that company as well. But that’s a subject for another day.

For now let’s return to Baidu and delve a little more deeply into its numbers. In this case it’s really all about Baidu’s core search business, referred to as Baidu Core on the company’s results announcement. Revenue at Baidu Core, which accounts for nearly three-quarters of Baidu’s total, grew at an anemic 8 percent in the first quarter to 17.5 billion yuan — not exactly anything to write home about. But far more alarming was a huge drop in Baidu Core’s operating profit, which crashed by 81 percent.

Growing Competition

Analysts were all abuzz about what led to that huge drop in profit for the company’s central search business. The verdict seems to be that the ad market in China is getting much more competitive these days as companies vie for a stagnating or even dwindling pool of advertising dollars. That wouldn’t be too surprising since signs coming from China’s economy have pointed to such a slowing for at least the last two years.

What’s more, Baidu itself is hardly the advertising dollar magnet it used to be. The company has been dogged by a number of scandals over the last few years related to misleading search results that promote paid advertisers without promoting that fact. It also came under fire earlier this year from a respected former journalist who said Baidu has effectively become a search engine that specializes in finding results for its own content. (English article)

When it looked like global search giant Google (Nasdaq: GOOG) might be coming back to China last year (previous post), many welcomed that move due to feelings that Baidu had become fat, lazy and somewhat corrupt over the last decade in the absence of a serious rival. Baidu itself realized it couldn’t rely on search forever, and founder Robin Li has been pushing heavily lately into artificial intelligence (AI) to try and diversify in anticipation of that day.

It’s hard to say at the moment if the AI efforts are bearing much fruit yet. Most of those efforts are focused in self-driving cars, an area China wants to develop but one that hasn’t gone too far yet in terms of putting real cars on the road. Another promising area for Baidu is online video in the form of its up-and-coming iQiyi (Nasdaq: IQ) unit. But iQiyi is still losing large money, and it’s not too clear if there’s a good long-term profit model in there.

At the end of the day, I’m not convinced that AI is going to help Baidu anytime soon. Neither will online video. And these latest results show that the core search business may be headed south as well. With all those negative signs on the dashboard, it’s hard to get excited about this company, and one could even start to wonder if Baidu has what it takes to survive over the longer term future.




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