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Bear of the Day

Baidu Inc. (BIDU - Free Report) recently lowered full year guidance. This Zacks Rank #5 (Strong Sell) is seeing a revenue shortfall as healthcare providers hold back on advertising.

Baidu is China's largest Internet search provider.

Revenue Guidance Cut

On June 13, Baidu surprised Wall Street by cutting its second quarter revenue guidance to a range of $2.807 billion to $2.823 billion from the prior guidance of $3.119 billion to $3.192 billion.

Healthcare providers have delayed advertising while they wait for clarity on recent regulatory actions.

Baidu itself has also taken steps to implement new measures requested by regulatory authorities, such as modifying paid search practices.

Healthcare accounts for about 20% of search revenue.

Estimates Cut

The analysts responded by cutting their earnings estimates for this year and next.

2 cut for 2016 which lowered the Zacks Consensus Estimate to $4.85 from $5.51.

3 estimates were cut for 2017 as well. The 2017 Zacks Consensus fell to $6.98 from $7.61 in the last 7 days. That's still year over year earnings growth of 43%, however.

While Wall Street was surprised that the regulatory review was taking this long, its not expected to impact Baidu for the long-term.

Baidu continues to be the top Internet search portal. Once the regulations are clarified, the healthcare companies really have nowhere else to advertise so they will return. It's just a short-term slowdown, not a fundamental change to the business.

Shares Fell on the News

Shares are still well off the 2014 highs as earnings have sunk in the last 2 years.

And the shares still aren't cheap. Baidu is trading with a forward P/E of 33. It's not like an investor is getting a great deal.

Still interested in investing in an Internet company, but want one without as many regulatory issues?

You might want to consider Alphabet (GOOGL - Free Report) , which doesn't do business in China. It is a Zacks Rank #3 (Hold). It is expected to grow earnings by 14.7% in 2016 and another 19.6% in 2017.

And it's actually a cheaper stock than Baidu, with a forward P/E of 27.

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec and she also hosts the Zacks Market Edge Podcast on iTunes.


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