Baidu share price: 4 observations ahead of 2019’s Q4 earnings

Here are four key considerations for shareholders before Baidu releases its fourth quarter report on Thursday 27 February.

When will Baidu Inc.’s Q4 FY2019 financial results be released?

Chinese search engine giant Baidu Inc., which has 189 million daily active users as of September 2019, is due to announce its Q4 FY2019 financial results on Thursday 27 February.

The internet company had initially planned for earnings to be released on 06 February, but postponed the release due to the evolving situation brought upon by the outbreak of the novel coronavirus (COVID-19) in China.

After a highly disappointing third quarter, in which the group registered a net loss of over US$900 million, shareholders are now eagerly anticipating 2019’s final quarterly update. Here are four things investors should know ahead of results day.

Full-year financial guidance: ‘non-GAAP (adjusted) net income to grow around 50%’

The company issued the following guidance with regards to its Q4 and full-year financial results.

For the fourth quarter 2019, Baidu expects revenue to be in the range of RMB28.3 billion (US$4.06 billion) to RMB28.9 billion (US$4.15 billion), increasing by 4% to 6% year-on-year, compared to its previous guidance in the range of RMB27.1 billion to RMB28.7 billion, or -1% to 6% increase year over year.

This forecast assumes that core advertising revenue will grow between 4% to 6% year-on-year, compared to the previous guidance between 0% to 6% year over year.

In addition, Baidu expects net income attributable to Baidu to be in the range of RMB6.2 billion (US$0.89 billion) to RMB6.7 billion (US$0.97 billion), which assumes that net income attributable to the core advertising segment will grow between 83% to 90% year over year.

Baidu also expects non-GAAP (adjusted) net income attributable to its core segment to be in the range of RMB8.9 billion (US$1.28 billion) to RMB9.4 billion (US$1.36 billion), which assumes that adjusted net income attributable to the core segment will grow between 50% to 55% year-over-year.

Baidu had a dismal third quarter in 2019

Although Baidu CFO Herman Yu said the company ‘delivered a solid third quarter’, citing a 7% higher revenue of RMB 28.1 billion versus the prior quarter; a deeper probe into the spreadsheet revealed that the Wall Street-listed group actually recorded an overall unadjusted net loss for Q3 2019 of RMB6.4 billion, down a whopping 892% from the second quarter.

It had blamed this on ‘a non-cash impairment loss of RMB8.9 billion on equity investments that have experienced an other-than-temporary decline in valuation’.

The core advertising segment, which accounted for over 70% of the group’s total revenue, fared just as bad, registering an unadjusted net loss of RMB4.3 billion for the three months ended September 2019. This is a huge decline of 600% against the previous quarter.

Unadjusted diluted earnings per share was also in the red at -RMB18.37 per share, a drop of 2.57% from the previous quarter.

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Analyst: FY2020 revenue to be hit hard by COVID-19

While some companies like Alibaba and Tencent are expected to see upsides from COVID-19, thanks to the nature of their e-commerce and digital entertainment businesses, Morningstar Asia Equity Research Analyst Chelsey Tam says Baidu is likely to lose out because of its large advertising exposure.

She noted that there will be an overall negative impact to the group’s core advertising revenue of as much as 65% in the first quarter of FY2020, with more companies lowering their advertising budgets amid weaker economic activity during this time.

Tam added that the long-awaited advertising spending recovery from 2019's Q3 losses is expected to be delayed as a result of reduced business demand for ads, which will affect advertising-focused firms like Weibo and Baidu the most. Advertising made up 73% of Baidu’s total revenue in the third quarter of 2019.

Although Morningstar anticipates a surge in searches related to the coronavirus on Baidu, which could lead to higher conversion for some medical ads, the overall impact still skews against the business with medical ads estimated to account for less than 20% of Baidu's core advertising revenue.

Investors can expect updates on COVID-19's business impact in the upcoming Q4 report.

Baidu’s share price down 10% since COVID-19 outbreak

Furthermore, since the outbreak of COVID-19, the search engine firm’s share price has plummeted by nearly 10%.

Prior to the health epidemic, Baidu shares were trading at US$139.61 per share on 21 January. Stocks are now moving along the US$125.80 mark.

Due to the widening spread of the coronavirus, share price was down as much as 14.5% this year.

Of the 36 investment analysts polled by CNN Business at the start of February 2020, 27 have rated the stock a ‘buy’, one gave an ‘outperform’ rating, while eight put their money on ‘hold’.

The analysts have also given an average earnings per share estimate for Q4 of RMB15.89 per share alongside a total revenue of RMB28 billion.

Morningstar’s Tam is much more conservative, predicting that Baidu’s unadjusted full-year net profit for 2019 will drop by 88.9%.

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