Baidu loses US$10 billion as firm sees steepest decline in share price since 2008

PUBLISHED : Wednesday, 29 July, 2015, 11:13am
UPDATED : Wednesday, 29 July, 2015, 11:13am

Chinese online search giant Baidu saw the steepest decline in its US-traded shares since 2008, wiping off about US$10 billion from the company’s value.

Shares of Nasdaq-listed Baidu were down 15 per cent to finish at US$168.03 on Tuesday. That was also the stock’s lowest close since it reached US$166.42 on June 5 last year.

The sharp sell-off in Baidu’s shares came a day after the Beijing-based company forecast third-quarter revenue below Wall Street expectations and increased investments on its online-to-offline (O2O) businesses over the next several years.

The company projected total revenue in the third quarter to range from 18.17 billion yuan to 18.58 billion yuan, representing a 34.4 per cent to 37.4 per cent year-on-year growth. That was below the 18.79 billion yuan average estimate made by market analysts surveyed by Thomson Reuters.

“Management estimates the O2O market in China is 10 trillion yuan (US$1.633 trillion), and its very strong initial success is giving it confidence to increase investment aggressively,” Chi Tsang, the head of Asia internet equity research at HSBC, said in a report published on Tuesday.

Baidu is expected to raise its selling, general and administrative expenses between 80 per cent to 90 per cent year on year in the second half of this year, which implied about 19 billion yuan in such spending for the period. That is up from the original guidance of 50 per cent year on year, which was worth 15 billion yuan.

“While we are surprised by the rapid step up in spending, we believe strong share gains support this investment,” the HSBC analyst said.

Baidu announced last month that it will invest about US$3.2 billion over the next three years in Nuomi, which links online shoppers to brick-and-mortar retailers.

Now with a market capitalisation of US$59.02 billion, Baidu on Monday reported a 3.3 per cent increase in net profit in the second quarter, which was offset by higher operating expenses and investments.

Alicia Yap, the head of China internet research at Barclays, said in a report that increased promotional campaigns for group-buying service Nuomi as well as incremental marketing investment for online travel site operator Qunar resulted in additional selling, general and administrative expenses in the second quarter.

“Because of the early stage nature [of its O2O businesses), we'll have to invest aggressively to make sure we will be successful,” Robin Li Yanhong, the chairman and chief executive at Baidu, said in a conference call with analysts on Monday.

As of June 30, Baidu had cash, cash equivalents and short-term investments worth US$12.09 billion to help support that initiative.

The company for the first time reported the gross merchandise value of its existing O2O businesses Nuomi, Qunar and Baidu Takeout Delivery. This value — representing the total amount of merchandise sold by an e-commerce operation over a certain period before deducting fees and expenses — climbed 109 per cent year on year to 40.5 billion yuan.

Li pointed out that there was no timeline on when Baidu’s O2O investments should pay off. “Whether that’s in three years or five years, it’s really hard to tell at this point,” he said.

Baidu chief financial officer Jennifer Li reiterated that the company was continuing to gain market share in those businesses on mainland China.

She said Baidu “would basically double down” on its investments “to see really phenomenal growth continue to come from the O2O” market.

The company’s net profit in the quarter to June rose to 3.662 billion yuan, from 3.547 billion yuan in the same period last year, on the back of greater mobile business.

Total revenue jumped 38.3 per cent in the second quarter to 16.575 billion yuan, up from 11.986 billion yuan a year ago.

Monthly active users of Baidu’s mobile search platform grew 24 per cent year on year to 629 million in June, while those using mobile maps increased 48 per cent year on year in the same period.

“With Baidu's cornerstone search business delivering solid growth and enjoying ample runway ahead, and with powerful mobile gateways to leverage, we are ideally positioned to capture the O2O e-commerce opportunity and build the 'Next Baidu’,” Li said.

Baidu had about 590,000 active online marketing customers in the second quarter. Revenue per online marketing customer in that period advanced 13.2 per cent year on year to 27,400 yuan.

The company, however, has had to spend more to further grow its business and more effectively compete against its main rivals Alibaba Group and Tencent Holdings, which have made bigger bets in mainland China and overseas.

Selling, general and administrative expenses for Baidu in the second quarter increased 81 per cent year on year to 3.89 billion yuan due to higher promotional spending for the company’s O2O business.

Research and development costs in the same period were up 56.2 per cent year on year to 2.713 billion yuan as the company hired more personnel in this field.

Content expenses last quarter reached 840.2 million yuan, representing 5.1 per cent of Baidu’s total revenue. That was higher compared to 3 per cent in the corresponding period last year. The increase was mainly due to increased content costs of online video service iQiyi.