Baidu May Surprise In Upcoming Q2 Earnings Release

Jul.24.14 | About: Baidu, Inc. (BIDU)

Summary

Baidu could beat analysts' consensus by a good chance. As predicted by our model: Q2 Baidu earning per ADS 8.9 to 9.05 Yuan (1.43 to 1.46 USD); margin around 26%.

Since 2011, Baidu performed extraordinarily well in each Q2. Average profit QoQ growth rate in Q2 is 43.02% vs. -12.99% in Q1 and all-time average of 4.5%.

Baidu never missed its revenue outlook in Q2. Since 2011, there's a 75% chance that actual Q2 revenue would be greater than upper estimate from preceding Q1 prediction.

Baidu's dominant position in mobile Internet became even stronger. Baidu's market share was 78.6% in April and 79.3% in May.

China's GDP increased sharply 7.5% YoY, which is a very positive sign for Baidu. Increased personal consumption expenditure virtually means the rise in spending in online ads.

Given that online marketing revenue still is extremely crucial to Baidu's (NASDAQ:BIDU) revenue (98.75% of Baidu's revenue is from online Marketing in Q1 2014), the revenue per OMC (online marketing customer) and the number of active OMCs is utterly important if we want to estimate Q2's revenue and profit.

BIDU Seasonality

Source: All data in this chart are from official Baidu earning reports; chart created by the author.

Historically, Baidu's OMC on average paid 23.63% more in Q2 than Q1 since 2011. Revenue, profit QvQ growth rate, revenue per OMC and the number of active OMCs all grew significantly in Q2.

Click to enlarge

Source: All data in this chart are from official Baidu earning reports; chart created by the author.

Source: All data in this chart are from official Baidu earning reports; chart created by the author.

Estimates

As we all know, BAIDU has invested aggressively in the first half of this year, so the total cost would be bigger than ever. Considering the recent substantial investment, we have adjusted our parameters of our valuation model to suit such a situation and the predicted result has proved our point: Estimated total cost (total cost = revenue cost + selling, general and admin. + research and development) for Q2 is 8.93 billion yuan (1.44 billion USD). That is not only the highest total cost in Baidu history, but also the greatest total cost QoQ growth rate ever (roughly 26%).

Although Q2 has the highest cost growth rate and quarterly total cost, due to a robust rise in revenue, we will still have a pretty good profit. The model generated a Q2 profit of 3.14 billion yuan (0.51 billion USD); earnings per ADS would be 8.9 to 9.05 yuan (1.43 to 1.46 USD) with an impressive 23.7% to 25.5% QoQ growth rate.

Predicted Values of Baidu's Q2 Revenue, Net Profit, Total Cost and Earning Per ADS

Source: All generated by my model.

Source: Consensus estimates are from Zacks Research, Yahoo Finance, and MarketWatch.

Although my model predicted this quarter could have a 26% QoQ profit growth rate, which also is the lowest growth rate of all Q2 (Q2 average rate is 43.02%), my estimate still is relatively high compared to other analysts' consensus estimates on earnings per share. I believe there's a pretty good chance that the actual Q2 EPS would beat consensus.

After Earnings

What will happen after Baidu's earning release? There are two important dates that may need our attention:

  1. July 30, 2014: U.S. GDP Growth Rate QoQ Adv., Consensus 3.6%
  2. Aug. 1, 2014: U.S. Non-Farm Payrolls and Unemployment Rate Release

We possibly had similar situations in Q2 2012 and Q2 2013. Baidu has impressive 47.11% and 29.48% QoQ profit growth rate in Q2 2012 and 2013, respectively. Situations after earnings were as follows:

In 2013:

Source: All data in this chart are from official Baidu earning reports, the U.S. Bureau of Economic Analysis, and the U.S. Bureau of Labor Statistics; chart created by the author.

In 2012:

Source: All data in this chart are from official Baidu earning reports, the U.S. Bureau of Economic Analysis, and the U.S. Bureau of Labor Statistics; chart created by the author.

Mobile Internet Search

According to a recent report published by UpperPlus, Baidu dominated the mobile Internet search market in China in the second quarter, with market share up to 78.7% in April and 79.3% in May. That's while Baidu's biggest rival in desktop search, QIHU 360, only had 1.9% and 1.6% in April and May, respectively.

The following two charts are from UpperPlus' "Search Market Research Report" (written in Chinese). You can use this link to download the detailed report.

Disclosure: The author is long BIDU. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.