Baidu Can't Blow It Tomorrow

Baidu reports its third-quarter results tomorrow. It better not disappoint the market.

Expectations are high. Analysts see a profit of $8.65 a share -- slightly above last year's showing -- but that's not a deal breaker. The market knows that Baidu's investing in mobile, video, social, and other growth initiatives that won't pay off right away. 

The real meat in the report should be revenue. Three months ago, Baidu was targeting 40% to 43% in top-line growth for the third quarter. There doesn't seem to be any reason to expect Baidu to fall short. The sentiment has been upbeat in China, and fears that Qihoo 360 would challenge Baidu for search supremacy have been pretty much dismissed. There's room for both companies in the growing search market, but Baidu continues to be the dominant player.

Baidu has had a redemptive summer, going shopping to help lift its spirits and its share price. Baidu kicked things off by acquiring the leading apps marketplace provider in China. It followed that up a month later by striking a deal with Renren to buy a majority stake in its Nuomi group-buying website. There is still plenty of growth to be had organically at Baidu, but it only helps to pursue these incremental opportunities. The mobile deal was the real head turner, shooting down the doubts that Baidu was vulnerable outside of desktop search as the world shifts to smartphones and tablets.  

Even before the summertime spending spree, Baidu was making deals in everything from online travel to streaming video. Its shrewd move to pair up iQiyi with PPS in May turned Baidu into a Web video force rivaling market leader Youku Tudou with nearly 14 million unique visitors across both sites. 

Most of these deals are in areas where the margins aren't as wide as Baidu has enjoyed in search. Renren and Youku Tudou are actually losing money despite their positions of niche leadership, so as Baidu broadens its reach into these areas it's a surprise that overall profitability can continue to move higher. This is still important for Baidu. These connections make it a lot easier to draw Internet users to search. We saw Qihoo 360 do it, coming out of nowhere to become China's second-largest search engine on the strength of the traffic it can pull as the top dog in Web browsers and security software. Baidu needs to be everywhere if it wants to reach everyone.

Most of the economic growth data out of China has been encouraging, so what does Baidu really need to prove in tomorrow's report? Well, have you seen the stock lately? The shares began this week 41% higher than they were when it posted its second-quarter results. That's $14 billion in market cap appreciation, giving Baidu little margin for error here. Revenue better grow at least 40%. The margin contraction better be justified. Naturally, Baidu's outlook must also impress. The stock has clawed its way back to become a dot-com darling after bottoming out in the double digits late last year. It doesn't want to be dismissed by investors again.

The mobile revolution is still in its infancy
But with so many different companies, it can be daunting to know how to profit in the space. Fortunately, The Motley Fool has released a free report on mobile named "The Next Trillion-Dollar Revolution" that tells you how. The report describes why this seismic shift will dwarf any other technology revolution seen before it and also names the company at the forefront of the trend. You can access this report today by clicking here -- it's free.

The article Baidu Can't Blow It Tomorrow originally appeared on

Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story