Baidu shares plummet after the Chinese search site switches its ad technology

Baidu (BIDU) -- the Google of China -- took a major stock market beating Tuesday, as investors bailed out following the company's warning that revenue may fall while it rolls out a new advertising system. On Monday, Baidu announced a 42 percent jump in third-quarter profit, beating analysts' expectations, as more large clients moved into web advertising. But the shares plunged after the company said it expects a "temporary negative impact" on next quarter's revenue as it transitions to the new ad system, called Phoenix Nest.

The stock market chaos following the announcement was a jarring event for a company almost as synonymous with internet search in China as Google is in the U.S. Baidu's new technology, introduced in April, is designed to replace its current keyword ad bidding process.

Thanks to the ad switch, Baidu projected disappointing fourth-quarter revenue of $174 million to $180 million, missing the $205 million Wall Street was forecasting. Analysts bickered about what the ad system move meant for Baidu's long-term prospects, but most agreed that in the short term revenues would be down, and rivals would have some daylight to make moves.

On a conference call with investors, Haoyu Shen, Baidu's vice president of business operations, said the ad switch will cut revenue growth by 10 points next quarter. "It will probably take a couple quarters from the date of the switch for the situation to settle down and for us to return to a normal growth trajectory," he said, according to Dow Jones.

China, which recently surpassed the U.S. in internet users, has a vast and still-largely untapped potential internet ad market worth billions. On the call, Baidu CEO Robin Li attempted to reassure investors about the transition.

"I understand many of you have concerns regarding the switch to Phoenix Nest," said Li, according to Dow Jones. "I want to assure you that this is a strategic decision made by the management. We did careful calculations, and we think 12 months from now when we look back, we will be happy with the switch. We truly believe that Phoenix Nest is a superior monetization system, and time will tell that we are making the right decision."

Baidu shares were trading down almost 13 percent to $378.03 Tuesday morning as investors reacted negatively to the news. Several Wall Street analysts slashed their stock-price targets. Baidu shares had plunged as much as 20 percent lower in early trading Tuesday.

Some analysts saw the pummeling as merely a temporary setback for a company that -- like Google -- has tapped into the rich vein of internet search advertising.

"We believe the transition will result in short-term pain but long-term gain in terms of monetization as [Phoenix Nest] increases the matching of more relevant paid links resulting in higher click-through rates," Oppenheimer & Co. analyst Paul Keung wrote in a note to investors.

Susquehanna analyst C. Ming Zhao said the transition to the new ad system -- which is required for Baidu customers -- may result in lower sales over the short term but will lead to "healthier and more sustainable growth in the future." Investors who aren't bailing out now are betting that these views are prescient.

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