Will Baidu Earnings Keep the Stock Surging?

Baidu will release its quarterly report on Tuesday, and the Chinese Internet-search giant has seen a massive recovery in its shares from earlier in the year. Fears that Qihoo 360 would threaten Baidu's huge lead in the search space have given way to the realization that Baidu has huge growth potential in the rapidly rising Chinese Internet space, and a recent move from Sohu.com to join forces with Tencent Holdings rather than Qihoo 360 should keep Baidu in its leadership position for years to come.

Baidu shareholders spent much of the past year believing the bearish case for the company, looking at the pace at which Qihoo 360 managed to build a solid minority position in the Chinese search industry. But more recently, investors have realized that revenue growth at Baidu has continued to be strong, and the success of marketing efforts has actually boosted ad demand for Baidu's core business. As Baidu looks to expand beyond China's borders to gain a larger share of the broader Asian market, is the company only at the beginning of a big growth spurt? Let's take an early look at what's been happening with Baidu over the past quarter and what we're likely to see in its report.

Stats on Baidu

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$1.45 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

How can Baidu earnings growth accelerate?
In recent months, analysts have had mixed views on Baidu earnings, raising third-quarter estimates slightly but keeping full-year 2013 and 2014 projections flat to slightly lower. The stock, though, has soared, with gains of 26% since late July.

Baidu got back in the swing of things with its second-quarter earnings report, in which the company reported a 39% jump in revenue and topped expectations on the bottom line as well. Even more importantly, Baidu projected that its third-quarter sales growth would be even faster, with 40% to 43% gains expected. For its part, Qihoo 360 also saw huge gains in its quarterly results, doubling sales on a nearly 150% jump in adjusted earnings. So far, though, it appears that the entire industry is healthy, making it possible for both companies to prosper.

Baidu has seen several encouraging trends lately. Mobile ad revenue is still just a small part of Baidu's overall business, but the company managed to reach the 10% mark in mobile sales as a percentage of total revenue for the first time. Accelerating numbers of online marketing partners has also supported the company's success.

One of the big battles of the quarter involved a potential fight for Sohu's Sogou search engine. Sogou holds the No. 3 spot in the search market behind Baidu and Qihoo 360, and many analysts believed that Qihoo 360 should buy Sogou in order to solidify its No. 2 position in the Internet search market in China and present an even bigger threat to Baidu. Yet with Tencent having taken a stake in Sogou, Qihoo got shut out, and so it will continue to be a three-party race in the search space.

Looking forward, Baidu has a huge number of potential strategic options to consider. It bought a 59% stake in Renren's Nuomi daily deals subsidiary in August, and some believe that a full takeover of Renren could help Baidu not only by giving it total control of Nuomi but also its social-networking site. After the canny move of buying mobile-app marketplace company 91 Wireless for $1.9 billion in July, further mobile-oriented buys would also be a potentially lucrative way for Baidu to use its extensive financial resources.

In the Baidu earnings report, watch to see if the company keeps boosting its spending on internal growth opportunities. High expenses can make Baidu's earnings look weaker, but if that money goes toward productive growth-enhancing initiatives, it could help send shares even higher in the months and years to come.

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The article Will Baidu Earnings Keep the Stock Surging? originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Baidu and Sohu.com and owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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