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WHAT CAN WE EXPECT FROM BAIDU EARNINGS?

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WHAT CAN WE EXPECT FROM BAIDU EARNINGS?

April 29 2015, 07.40am GMT

STOCK.com

The giant in online search in China, Baidu, is set to report 1st quarter earnings on Wednesday. Investors are curious if the company’s growth rate can justify the premium stock price.

Baidu (NASDAQ: BIDU), the online search giant in China, is set to report its first quarter earnings results this Wednesday. Given that the stock is currently traded at 40x earnings, most investors will be watching closely for evidence that continued company growth rates can justify the high price tag of the stock.

Analysts maintain high expectations on revenue growth for Baidu. Compared to the previous year’s revenue of $1.52 billion, the consensus estimate for the first quarter sees a 36% increase to $2.08 billion in revenue. Meanwhile, the company’s management guidance for revenue is from $2.04 billion to $2.1 billion. It is important to note that this rate would however mark a decline from the company’s 47.5% year-over-year revenue growth in the fourth quarter and 2014 full year growth in revenue of 53.6% compared to 2013.

Optimism from analysts is low regarding Baidu’s earnings per share in the 1st quarter as they mainly focused on revenue growth. Analysts say that Baidu’s continued heavy spending on marketing, sales and research & development (R&D), may negatively impact earnings. Analysts, on average, expect the company’s earnings per share (EPS) to be $1.04 per share, decreasing from $1.16 in the same quarter last year.

With predictions of a decline of 8.1% in revenues and 28.3% in earnings for the first quarter, analysts are expecting a slowdown in Baidu’s business. The somewhat negative outlook from analysts on the first quarter’s data in comparison with the previous quarter shows historically a slow quarter for Baidu, based on seasonality. Further contributing to the negative impact on this quarter’s earnings was the 2015 Chinese New Year that came slightly later in comparison to 2014. In addition to both seasonality and the Chinese New Year’s later timing, the company’s management further noted that during 4th quarter earnings, its growth in mobile traffic increased; however, mobile currently earns a lower rate than PCs, and would too impact on profitability.

On Wednesday, when the company reports its 1st quarter results, investors should focus specifically on Baidu’s spending. Anyone who follows the stock more closely would likely be familiar with Baidu’s significant increase in R&D, marketing and sales spending. Last year, in 2014, the company’s spending in sales, general and administrative soared 69 percent above the previous year. The company’s R&D spending increased 70 percent during the same period.

The company’s management strongly believes that the increased spending required to support the mobile initiatives will attract handsome long term payoffs. However, management do see an eventual relief in the heavy spending required to support its aggressive mobile expansion. Baidu’s management stated in its 4th quarter earnings report that for 2015 it plans to ramp up spending on sales, general and administrative (SG&A) by similar amounts as the previous year. The 2014 increase in SG&A in comparison to 2013 was around $840 million.

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