Why Did These Results Hurt Baidu’s Stock Price?

The Chinese search engine Baidu (NASDAQ:BIDU) beat analysts’ expectations with a 36 percent gain in fourth-quarter profit, but that was not enough. The increase was its slowest growth since 2009 and the company disappointed investors with a soft guidance for 2013; following the release of the earnings report, shares began a downward spiral. In after hours, just after 6 p.m. Eastern Standard Time, the stock was trading down 5.32 percent at $101.50.

It was just as analysts feared; Maxim Group predicted in a research note seen by Barron’s that the company will likely meet its quarterly guidance, but its margins and profitability would be hurt in the future. The firm lowered its price target to $80 per share as a result of its concerns for the upcoming year.

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Baidu reported that revenue rose 41.6 percent year-over-year to $1.017 billion, above what both Wall Street and the company itself had estimated. For the three-month, Baidu posted a net income of 448.7 million, or $1.28 per share. However, for the next quarter, the company predicted revenue of between $945.4 million to $975.9 million, a decrease from the search provider’s most recently reported results. Analysts polled by Thomson Reuters were expecting a forecast for revenue of $964 million, a figure which falls between the company’s range.
While Chief Executive Officer Robin Li said that the company planned to “continue to enhance functionality, introduce new products, and step up efforts to push our products to users” in 2013, the lower guidance acknowledged the difficulties the company is expected to face in coming months.

In a forecast for the fourth, Baidu warned that tough economic conditions in China would affect its earnings, but the results were hurt by a variety of factors: growing competition from recent search-market entrant Qihoo 360 Technology (NYSE:QIHU), increased margin pressures associated with the company’s added focus on its mobile platform, and high capital expenditures.

Qihoo only launched its search engine in August of 2012, but it is already a powerful force in the industry. The company has ”started to monetize its search service with the support from its partner Google,” wrote T.H. Capital analyst Tian Hou in a pre-earnings research note seen by Investors Business Daily. Qihoo made a search ad deal with the technology giant earlier this year. Even though Baidu remains the search leader in China, with a 60 percent market share, Qihoo secured a 10 percent share in its first few months of operations, although its gains have largely come from Google (NASDAQ:GOOG).

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