Categories Analysis, Technology

Baidu’s non-core segments might outshine search biz in post-Covid era

The topline dropped in Q1, hurt by a sharp decline in Baidu Core revenues

Baidu, Inc. (NASDAQ: BIDU) is rapidly evolving into a diversified tech company, expanding its footprint far beyond internet search service. As the China-based firm shifts focus to areas like artificial intelligence and robocars, there is concern that the core business is becoming stagnant.

Baidu’s unimpressive top-line performance in the March-quarter shows the Covid-related shutdown did not help the search business much, though there was strong growth in the number of iQIYI subscribers and Baidu App users despite a dip in marketing activity.

Streaming Push

Often referred to as the Google (GOOG) of China, Baidu mainly depends on online advertising to generate revenue. Of late, the spotlight has shifted to the fast-growing video streaming business iQIYI, which recorded a 9% revenue growth in the most recent quarter.

Also Read:  Baidu, Inc.  (NASDAQ: BIDU) Q1 2020 Earnings Call Transcript

Two factors that could determine Baidu’s future are its relevance in the already crowded video streaming space – especially in the wake of content demand spiking during the shutdown — and progress of its mobile transition. The steady growth of Baidu App even after the authorities relaxed the shutdown shows it is a long-term trend, at a time when there is a huge shift from browser-based search to the more user-friendly in-app search.

Diversification

Currently, the company is busy enhancing its AI capabilities to offer advanced services. It is also innovating its self-driving car project, which is expected to benefit from the stimulus package announced by the government. The slew of partnerships for providing clients high-tech services, including municipalities, underscore Baidu’s prowess in those areas. The conversational AI system DuerOS is very popular among original equipment manufacturers.

“Regarding to the smart device monetization potential, I think it’s going to be very similar to the mobile ecosystem in the sense that the revenue can come from selling hardware, selling subscription, selling advertising and even e-commerce. The difference is that, it’s a home-based device, and we maintain a better control on almost everything, from software until the back end of monetization.”

Robin Li, CEO of Baidu.

With the Chinese economy limping back to normal, services like travel and franchising are on the revival path, thanks to the resumption of offline activities after the shutdown. Healthcare is also witnessing an uptick in activity as hospitals are serving non-Covid patients also now.

Strong User Base

In general, Baidu executives are of the view that the key areas of the business, especially Baidu App, is gaining traction after recovering from the black swan event. The lackluster performance of the core search service could be a warning for the management that competition would eat into the company’s market share.

However, Baidu’s executive vice-president Dou Shen is confident about the tech firm’s ability to deal with competition. Responding to an analyst’s query at the post-earnings conference call, Shen said, “with Baidu App growing dramatically in terms of the user and traffic, and contributing to the vast majority of mobile search queries, so the trend is driving less and less dependency on traffic acquisition, actually, which is in contrast to the competitors who are still highly reliant on the acquired traffic.”

Unique Model

Of course, the subscription model wherein users log into the platform before engaging in search activities can give Baidu an edge over rival search providers. Also, the in-app search model keeps attracting users to the platform, with features that are absent in browser search.

Stock Performance

Soon after last week’s earnings announcement, Baidu’s shares bounced back from a multi-year low and maintained the uptrend since then. The Covid-linked selloff had come at a time when the market was looking for the much-needed recovery. Still, investors wouldn’t want to miss the buying opportunity, for the relatively low price and solid growth prospects of the stock.

Q1 Revenue Falls

In the three months ended March 31, a double-digit contraction in Baidu Core revenues resulted in a 7% fall in total revenues to $3.18 billion. Meanwhile, earnings per American Depositary Shares more than doubled to $1.25, surpassing the market’s projection. The bottom-line benefitted from a decline in traffic acquisition costs. Taking a cue from the volatile market conditions, the management issued conservative guidance for the second quarter.

Also Read:  Coupa Software (COUP) drops despite topping Q2 estimates; provides gloomy Q3 earnings outlook

Last month, Google’s CEO Sundar Pichai said Q1 was ‘a tale of two quarters’ for the internet giant, which reported solid earnings and topline growth, though advertising revenue dropped towards the end of the quarter.

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