Baidu (NASDAQ:BIDU) will report its Q4 results on Thursday with consensus expecting Rmb6.55 in EPS and Rmb18.56b in revenue, +32% y/y. The stock has been down 11% since the start of the year, underperforming the broader Nasdaq's -6.6% decline as the market remain concerned about the prospect of lower ad spending in China amid a weaker economy, and the ongoing investment that will continue to weigh in on profitably in the foreseeable future. In my view, I believe that BIDU is the weakest link relative to both Alibaba (NYSE:BABA) and Tencent (OTCPK:TCEHY) given the long-term revenue challenge faced by its core search business and its weak positioning in mobile payment, O2O and consumer transportation vs. BABA and Tencent.
Although I expect BIDU to report a largely in-line Q4, I am more skeptical of its Q1 and full-year guidance given the uncertainties surrounding the Chinese market. Most notably, Sogou (NASDAQ:SOHU) guided a weaker-than-expected revenue growth for Q1 with 16%-25% y/y growth, which potentially suggests that advertisers are starting to pull back on spending amid a weak Chinese economy, and this is a negative read-through to BIDU.
O2O remains the earnings drag this year with BIDU continuing to focus on the investment in Nuomi. It is interesting to find that most investors expect that the initial investment BIDU is committing to Nuomi will be front-end loaded, but I caution that the investment will likely stay elevated as rivals Tencent and BABA ramp up their investments in O2O. Although bundling could allow BIDU to drive higher margin and repeat customers, I would argue that most of the service/product offering by BIDU can be easily matched by its competitors. In short, near-term investment in O2O will continue to weigh in on BIDU's margins, and the recent $300-500m capital raise to fund its O2O business is a clear sign that competitive risk is escalating and will be BIDU's single greatest challenge this year. (see Baidu: Playing catch-up in food delivery)
Finally, I will also be looking for an update on BIDU's driverless car project. Given BIDU's need to diversify its revenue stream beyond online search, I see this to be a necessary area for BIDU as it looks to differentiate its business from that of BABA and Tencent that already have a wide lead over BIDU in many of the fast growing internet verticals such as O2O and mobile payment. While I remain cautious on BIDU's near-term outlook due to the disintermediation of the mobile apps, growing collaboration between BABA and Tencent and BIDU's disadvantage in key internet segments, I believe that projects involving autonomous vehicle, artificial intelligence and cloud services could differentiate BIDU from the rest.
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