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Bear of the Day

Baidu (BIDU - Free Report) reported Q2 earnings on July 28 and disappointed investors with their performance as well as with their guidance for the current quarter.

Baidu’s 2Q16 organic revenue grew 16% year-over-year and organic adjusted EBITDA fell 19%, both lagging consensus by about 1%. Investors may recall that this weak performance follows a mid-June reduction in revenue guidance to reflect weakness in the Search business following a crack-down on medical search advertising.

On June 17, my colleague Tracey Ryniec wrote about the situation...

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.

Back to a Zacks #5 Rank Strong Sell

When Tracey did her story on BIDU in June, the stock was trading around $165. It has only treaded water sideways since then. But as the downward estimate revisions roll in, that may put more pressure on shares.

Most analysts have been reducing 2016 and 2017 revenue projections by roughly 5% and 10% respectively on Search weakness and incremental tax issues, partially offset by stronger non-search revenue and reduced couponing.

In the last week, at least 2 analysts have knocked down EPS estimates resulting in the Zacks Consensus for 2016 dropping from $4.30 to $4.00, representing earnings "growth" of negative 73%. It was at $5.84 90 days ago, so you can see how much damage has been done here to the business outlook recently.

The 2017 EPS consensus estimate dropped from $6.75 to $6.28, signaling potential growth of 57% if the $4.00 number holds for this year. 90 days ago, next year's EPS projection was $8.19 so we are looking at a 23% slash to the forward profit picture this summer.

Management expects it will take 2 to 3 quarters to see a rebound.

What' the Problem at Baidu?

To sum up what's going on, analysts at Stifel Nicolaus describe the situation as "Ailing Cash Cow, Voracious Stars." Here's how they explain...

"Baidu's strategy is to use its Search business cash cow to fund the growth stars of Transaction Services and iQiyi. However the cash cow is ailing, and the stars are hungrier than every. We expect at least several quarters of tepid growth and weak profits at Baidu, and maintain a Hold rating on the shares."

Technically speaking, it looks like the stock is riding on a cliff at $160, just waiting to drop off. The next target would be the February lows near $140.

While I can't tell you if the risk/reward of shorting shares here at $160 is worth it for you, I can tell you unequivocally the stock is not a buy right now.

Analysts at Oppenheimer, in addition to lowering sales and profit estimates, lowered their 12-18 month price target from $196 to $188. Those numbers might be realistic if the company does turn the business around in the next few quarters.

But right now, listen to the Zacks Rank.

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