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Oppenheimer's Dubious Baidu Downgrade

Apr. 11, 2019 11:20 AM ETBaidu, Inc. (BIDU)GOOG, TWLO30 Comments
Akram's Razor profile picture
Akram's Razor


  • Oppenheimer's recent downgrade of Baidu amounted to nothing more than a regurgitation of news Baidu provided on their earnings call 2 months ago.
  • This oddly timed note is even more perplexing considering the market's recent focus on the potential rapid monetization of dominant utility apps like Google Maps.
  • 'Baidu Core's' entire valuation is now on par with several SAAS 3.0 market darlings with seemingly far less compelling businesses than Baidu's own rapidly growing and already similar-sized cloud business.
  • This idea was discussed in more depth with members of my private investing community, The Razor's Edge. Get started today »

Oppenheimer's Jason Helfstein Downgraded Baidu's (NASDAQ:BIDU) shares yesterday to market perform from outperform and pulled his price target on the stock (he'd been at $205). While most sell-side calls can amount to noise, this one was notable in that it did grab some headlines.

"Baidu's stock falls after downgrade by long-time bull"

Mr. Helfstein has been sitting at an outperform rating on the stock for two years which leads one to conclude that his sudden downgrade was predicated on some notable analytical insight or recent Baidu fundamental business development warranting immediate market attention.

Here is what he had to say:

We are lowering our rating to and removing our $205 price target as shares are likely range-bound on higher level of spending through the rest of 2019. We now expect BIDU to invest even more in key strategic areas (content, feeds, short video and cloud), which will not benefit revenue until late 2019 or early 2020. We think investments are necessary as China's search market growth is slowing to ~10% y/y and BIDU needs to invest in new growth drivers. While BIDU's core valuation is low, at 10x/8x '19E/'20E EBITDA, with momentum in news feed, short video and cloud, we think the company will see meaningful negative estimate revisions over the next earnings cycle."

Now I found this a bit dubious because everything in this note was disclosed by Baidu management on their Feb 21, Q4 earnings call.

Content, Feed/ short video commentary:

"Our focus to place greater reliance on organic traffic growth means that we are shifting our financial model to spending upfront marketing dollars with returns spread out over the life of the users. In other words, revenue from channel spend has a delayed effect, whereas revenue from TAC is reported in the quarter of expense.

In the

This article was written by

Akram's Razor profile picture
38 year old prop trader who loves to scour for great long and short investment ideas.

Analyst’s Disclosure: I am/we are long BIDU.

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Comments (30)

Never did short Bidu, but I think my previous comments on the issues search has going forward in China were spot on.
Yeah, I sold off all when I found out that lost search market share back in March. My thesis was based on the company to at least maintain market share in search.
D Lombardo profile picture
I read an article showing how far behind Baidu's autonomous platform is compared to Waymo's.

I like Baidu, but admit it's prospects are not clear.
oooops. BIDU tanking after hours. big miss. hope not too many are hurt. Oppenheimer was right?
Akram's Razor profile picture
More like Oppenheimer already knew. Puts an end to conspiracy theory debate about whats wrong here. Q closed March 31...those numbers were as expected...stock rallied to 186 in week from close of q and it would appear mgmt kindly steered sell-side to news that q2 visibility was not good. Hence the bleed lower...cause really this would be down 25% on this news considering already were viewing 14% h1 growth as temporary depressed vs h2. Mentioning head of search being replaced in pr is no mistake either...basically now acknowledging they need a change. Buyback pointless.
Baidu’s upcoming results will prove how silly this downgrade is. Totally agree with the author’s point. Thanks for the great analysis!
Am surprised the Oppenheimer research product is still listened to by investors, as the research isn't what it used to be.
upandatit profile picture
I hear the chief problem with BIDU is the management. CEO & his wife run it like a family company and have had a number of key managers depart unexpectedly.
Core business is good & on undemanding rating.
Google Maps and Google Earth will displace ESRI as the premier GIS platform within a decade. I see the shift accelerating. Within the past two years I noticed more x.kmz files are shared than x.shp files in my professional niche (non-profit natural resources sector). Even though ESRI has always kept costs low for us, Google is free, easier to use for the majority of map-making needs, and everyone coming out of college today has used Google Earth regardless of major. ESRI remains dominant in spatial analysis at the desktop, but with Google increasingly ubiquitous in day-to-day products, ESRI doesn't stand a chance. Extraordinary value in Google Maps and the temporal-spatial data being collected with every use.
Oh, and long BIDU.
Seems like there has been significant increase in last 1.5 years in option trading. Oppenheimer and others are getting clients, bigger ones to take recommended positions, and then they come out with an upgrade or a downgrade.
BIDU is trading at cheap multiples. But, one has to evaluate its search business to understand if it’s market share decline in March (to Shenma) is likely to continue. They have been gaining back market share since December. But, marketshare declined in March. (After heavily promoted February).

At the end of the day, search is where current profits are coming from. Cloud is too small, AI and Autonumous drive are too early to tell. OTT streaming will be a drag this year but content costs should improve by this time next year.

They also have equity stakes so more equity sales will generate value. I,e. Ctrip.and maybe even Iqiyi (but they will need a revenue growth driver)
There's only a small handful of really strong China stocks that are listed in the US, with strong business fundamentals and are still growing their profits AND market share... BIDU isn't one of them.
the market agrees with the analyst from oppenheimer. while i am long bidu (stock down another $5.00 plus today) i also know that the market can remain irrational for a long time. nothing good for bidu in the near future.
D Lombardo profile picture
Great article!

Analysts and for that matter, Investors are way way too ShortTerm oriented.
wow these analysts out there really want us to get cheaper shares. I regretted not picking up shares in 160's. Now they're giving me a second chance. What a blessing!
vancityinc profile picture
This is a fantastic report, thank you. 200 million cars with BIDU autonomous technology already? That seems pretty high, is this correct?
Agreed and I've continued to add to my position in Q4 2018 and Q1 2019. I plan to hold for potentially two decades if necessary to get a 20-25% annualized compound return.
Glenn Abrett profile picture
If baba, bidu, tcehy and jd (among, I imagine others) were american companies they would all probably be valued much higher. But Bidu stands out, even in this group. When it was 280/share it was absurdly undervalued. At 170 it is beyond ridiculous. Just added to my position a few minutes ago.
I agree with you but they’d be valued higher for good reason. Much more risk in Chinese stocks, so more conservative values are warranted. 30% of my portfolio is in BABA,TCEHY, and BIDU.
Did the same just now myself!
Analyst noise ( white noise) just more blah blah so even when they have nothing to say, they just gotta issue flatus from any end.
Underwhelming to say the least except for the smell of course!
BIDU search market share went down in March. Does anyone has a perspective on the cause behind this? They spent lots of marketing during the lunar new year. It’s a disappointment to see this type of results.
Tamarack Family Group (TFG) profile picture
Thank you for the analysis and granularity.
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