• Baidu stock down 30% year-to-date ahead of Q3 results.
  • Wall Street expects higher revenue, but earnings decline.
  • Impact of a regulatory crackdown on core search and advertising business.

Baidu Inc. (NASDAQ: BIDU) is scheduled to report its third-quarter results on November 17, 2021, before the market opens. The Chinese internet giant heads into the earning session, having underperformed the market for the better part of the year.

Image showing Baidu pull back

The stock is down by about 30% year to date. It has also lost more than 50% in market value from record highs of $354 recorded at the start of the year. The underperformance sums up a roller-coaster year for a good number of Chinese internet companies.

Chinese companies with huge internet presence have come under immense regulatory pressures in recent months. Authorities in China have embarked on a regulatory crackdown targeting companies operating as monopolies. The wave of the crackdown has taken a significant toll on Baidu sentiments in the market, thus the stock’s underperformance.

Baidu heads into the earning session amid the regulatory concerns and their potential impact on the Q3 results. However strong internet foundation and growing user engagement levels should allow the company to deliver better than expected results.

Q3 earning expectations

Wall Street expects Baidu to deliver Q3 2021 revenue of $4.81 billion, representing a 15.8% year-over-year growth. Management, on the other hand, expects revenue to range between $4.7 billion and $5.2 billion, suggesting a growth rate of between 8% and 19% year-over-year.

In the second quarter, Baidu delivered a 20% year-over-year increase in revenue to $4.86 billion. The increase at the time was driven by the growth of the AI business. Consequently, a 15.8% growth in Q3 will indicate slowing growth sequentially.

Earnings, on the other hand, are expected to come in at $1.72 a share, suggesting a 42.7% decline from the same quarter last year. In contrast, the company delivered earnings per share of $2.39 in the second quarter.

What to look out for when Baidu reports

When Baidu reports, the market looks set to analyze the company’s autonomous driving expansion, a segment expected to be a key driver of value going forward. The company has been gaining traction with its Apollo Go Robotaxi service across China, waiting to see if the momentum continued in Q3.

However, the company’s core search and advertising business is expected to draw the most attention as it is the key driver of the bottom line. More than two thirds of the company’s revenue comes from marketing through search ads, given that the company controls about 72% of China’s search traffic.

Consequently, the market will want to know if the company continues to see solid growth on search ads at a time when China has embarked on a regulatory crackdown. While the company operates as a monopoly, its operations are under more pressure than ever.

In addition, the focus will be on the company’s online entertainment service iQIYI, which is emerging as a key segment in driving top-line growth. Solid momentum on this front should have allowed the company to see significant growth in the subscription base.

Chart showing iQIYI revenue growth trajectory

Baidu is also believed to have felt the full impact of higher promotional activities. Consequently, higher promotional expenses could affect the company’s performance.

Bottom line

The underperformance of Baidu stock in the market has everything to do with the feud between tech companies and the Chinese government. The crackdown has triggered fear among investors resulting in a sell-off which explains why Baidu is trading with low multiples.

A solid third-quarter report should affirm Baidu’s growth rate, strengthening investors’ sentiments in the stock resulting in a bounce back after the deep pull back from record highs. Similarly, a disappointing report could send jitters in the investment community, accelerating the underlying sell-off.