CTI26 Notes – Baidu 1Q19 – Building a flywheel

Disclaimer: These notes are shared for informational and educational purposes only. THIS IS NOT INVESTMENT ADVICE.

These notes are for China Tech Investor podcast episode 26, listen on overcast or anchor.fm.

Quick note about format. We covered two companies in this episode. I’ve decided to separately post the notes for each company, so they will be searchable by tag. — That’s all.

Baidu announced Q4’2018 results on May 16 2019 [1] and sharply traded down. It was their first loss since 2005 and their search executive resigned. They’ve been trending down since their high of 284 literally 1 year ago, May 16 2018. A 60% drop!

Baidu – BIDU

It traded around $114 yesterday. The last time it was in this range was the flash crash of Aug 24 2015. Before that it was July 2013, almost 6 years ago!
And, you know what’s funny? Back in 2013 between 7/24 and 7/25, there was a gap from $113.88 to $120.26, more than $4 gap. In trading, there’s a saying, “Gaps eventually get filled” or “Gaps get tested”. Well, here it is, almost 6 years later, the gap is getting filled.

Baidu 6Y chart

What happened back then? It was their Q2 2013 earnings which had revenues up 38.6% YoY.

“Our market-leading technology, innovative new products and unrivaled customer value proposition will keep us at the heart of the Internet in China.”

Robin Li quoted in Baidu’s 2Q13 ER

Hard to argue that Baidu is at the heart of the internet in China. The “internet” moved to mobile and Baidu didn’t get the message much later.

Anyway, they’ve been trending down since their high of 284 literally 1 year before this recent earnings, May 16 2018.

You might ask, what is going on?

Let’s start with a look at some changes Baidu has been making. They are (1) building an ecosystem in Baidu App (2) with a focus on two buzz-words: “feed” and “mini programs“. A “feed” needs a constant source of content (preferably organic), so they have Baijiahao for text and Haokan for video.

My guess is they are trying to build a “flywheel” here. Where content pulls people in, gives them time-killer videos, answers their questions, and those interactions then feed their recommendation engine and maybe tells them what users are searching for, they then provide those results or build structured data portals around those areas, bringing more people in and so on.

But, there are headwinds.

  • “Content” is being heavily scrutinized in China.
  • Online gaming has come under regulatory pressure in the last 12+ months.
  • VCs are cutting back, which impacts marketing spend by startups.

The largest segment of Baidu’s revenues is Online Marketing Services. They sell advertising. It will be vital for Baidu to build this flywheel and get it turning at high speed–no easy task.

Baidu sees weakness in online gaming, financial services, real estate and autos.

Mentioned they are looking into reducing costs, the previously announced RMB 1B of additional Opex will be reduced.

Guidance is lower, to flat, taking out iQiyi. Q2 guiding revenue of RMB 25.1B to 26.6B.

Sources:

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