14 August 2020

Investors Search Harder for Baidu Growth Prospects

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News shaping
the markets today

     

What’s happening: Shares of Baidu headed south in extended trading on Thursday despite the Chinese search engine major reporting better-than-expected profits for the second quarter.

What happened: Although the world’s leading search engines and social platforms witnessed a strong rise in traffic and usage as people stayed home due to the pandemic, advertising revenues were severely hit and declined sharply during the second quarter.

Baidu is now experiencing a gradual recovery in ad revenues in its native market, despite stiff competition from rivals like Tencent and ByteDance. Sentiment was hurt, however, after the Chinese company made a key announcement related to its subsidiary.

How were the results: China’s leading search engine reported growth in net profits for the second quarter, despite a decline in revenues.

  • Revenues declined 1% to 26.03 billion yuan, or $3.7 billion, in-line with expectations of $3.7 billion.
  • Earnings came in at 3.6 billion yuan, significantly higher than the 2.4 billion yuan reported for the same quarter last year.
  • Excluding onetime items, earnings stood at $2.08 per share, beating the consensus estimate of $1.36 per share.

Why it matters: Baidu, which used to be a clear leader in search, has recently been struggling with adjusting to the new generation of mobile-first users. The company has been gradually losing ground to its competitors.

Moreover, several companies around the world cut back their ad spend amid the pandemic to conserve liquidity. Baidu’s online marketing revenues declined 8% to 17.7 billion yuan ($2.50 billion) in the quarter.

Rising geopolitical tensions between Beijing and Washington are also threatening the company’s growth. Investors were particularly concerned about the prospects of Chinese tech majors with the Trump administration issuing orders to ban the popular TikTok and WeChat apps.

The US Congress is also inching closer to pass a law that could bar Chinese companies from trading on America’s stock exchanges. Amid this panic, Baidu disclosed that the US SEC (Securities and Exchange Commission) had requested financial information from its subsidiary iQIYI, after short-seller Wolfpack Research accused the company of inflating revenue and user figures.

Baidu projected its third-quarter revenues in a range of 26.3 billion yuan ($3.7 billion) to 28.7 billion yuan ($4.1 billion). The lower end of the range represents a 6% decline and the higher end suggests a mere 2% increase. The company’s board approved to increase the share buyback program from $1 billion to $3 billion.

How shares responded: Shares of Baidu slipped 7% to $115.83 in after-hours trading following the release of quarterly results. The stock has surged more than 30% over the past three months.

What to watch: Investors will keep an eye on competitor activity and Baidu’s moves to protect its key advertising segments. The market will also focus on news related to rising tensions with the US.

The Markets Today

     

Crude oil will be in focus today, ahead of the Baker Hughes report on crude oil rigs.

Context: Oil futures settled lower on Thursday, after the IEA (International Energy Agency) lowered its 2020 projections for global crude demand.

Details: According to IEA’s monthly oil market report, the global demand for crude could plummet by 8.1 million bpd (barrels per day), which is 140,000 bpd lower than its earlier forecast. The IEA now projects global oil demand at 91.1 million bpd for 2020.

Earlier during the week, the OPEC (Organization of the Petroleum Exporting Countries) said in its monthly report that it expects crude demand to decline by 9.06 million bpd this year, higher than its earlier forecast of an 8.95 million bpd cutback.

Despite these grim reports, crude prices were supported by the EIA’s report showing a decline of 4.5 million barrels in crude stockpiles last week.

WTI (West Texas Intermediate) crude for September delivery fell 1% to close at $42.24 per barrel on the NYMEX (New York Mercantile Exchange). Brent crude for October also slipped 1% to close at $44.96 per barrel on the ICE Futures Europe.

Natural gas futures closed higher after the EIA reported a rise of 58 billion cubic feet in domestic supplies of natural gas during the week ending August 7. September natural gas gained 1.4% to $2.182 million British thermal units on Thursday.

What to watch: Investors await data on crude oil rigs from Baker Hughes. Crude oil rigs in the US fell to 176 in the August 7 week, versus 180 in the prior week.

Investors will continue to assess the covid-19 numbers, with total cases exceeding 20.9 million globally.

Other Markets: European indices were trading lower at 8:30am GMT, with the FTSE 100, French 40 and Dax 30 index down by 0.5%, 0.6% and 0.3%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Canada’s new motor vehicle sales and manufacturing sales as well as the US retail sales, unit labor costs, labor productivity, industrial production, University of Michigan's consumer sentiment index and business inventories.

 

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