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Bear of the Day: Baidu (BIDU)

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Baidu (BIDU - Free Report) , the $40 billion web search and marketing portal that used to be considered "the Google of China," especially as they forayed into AI technologies and self-driving cars, rallied over 16% since their strong Q1 earnings report on May 18. 
 
But guidance was cloudy enough to cause analysts to lower estimates and drive the stock into the cellar of the Zacks Rank.
 
Baidu sees Q2 revenue of $3.5 billion to $3.9 billion, vs. the consensus of $3.62B.
 
Since the report, the 2020 Zacks EPS Consensus among Wall Street analysts dropped over 14% from $7.59 to $6.50. 
 
Management also elaborated "For the second quarter of 2020, Baidu expects revenues to be between RMB 25.0B ($3.5B) and RMB 27.3B ($3.9B), representing a growth rate of -5% to 4% year over year, which assumes that Baidu Core revenue will grow between -8% to 2% year over year. The COVID-19 situation in China is evolving, and business visibility is very limited. The above forecast reflects Baidu's current and preliminary view, which is subject to substantial uncertainty."
 
As if this somber outlook were not enough of a headwind for investors, the company revealed a few days later that it was considering delisting from Nasdaq amid U.S.-China tensions. According to Reuters, Baidu is mulling delisting from Nasdaq and moving to an exchange closer to China in an effort to raise its valuation amid escalating tension between the United States and China regarding investments.
 
Julie Zhu and Zhang Yan of Reuters cited three sources with knowledge of the matter and explained that Baidu has contacted advisers looking at issues associated with funding and regulatory reaction. While the company reportedly believes it is undervalued on Nasdaq, the discussions are at an early stage and are subject to change.
 
Analyst Reaction to the Quarter
 
Baidu beat core operating profit estimates in Q1 by over 60% on strong cost controls and provided "encouraging signs" of a near-term revenue recovery, Mizuho analyst James Lee tells investors in a post-earnings research note. Lee remained "constructive" on the company's consistent revenue improvement in April and so far in May and he continues to expect a full recovery by Q4 of 2020. He maintained a Buy rating on BIDU shares with a $175 price target.
 
Meanwhile, HSBC analyst Binnie Wong raised the firm's price target on Baidu to $132 from $120 and kept a Buy rating on the shares. While FY20 continues to be a transition year to Wong, she is seeing some positive signs for long-term recovery.
 
And KeyBanc analyst Hans Chung raised the firm's price target on Baidu to $145 from $136 with an Overweight rating. Though ad demand for offline related business has not fully recovered from the COVID-19 pandemic, the recovery is tracking ahead of expectations he said. Chung notes that higher base of user engagement could support monetization upside after demand normalizes. Further, margin expansion, AI ramps, and growth reacceleration in core online marketing could remain key catalysts for the second half of 2020 and 2021.
 
Another feather in BIDU's cap is the valuation vs other tech giant peers. While this year's topline may only grow 2% to $15.85 billion, that makes the stock trade under 3 times sales.
 
Bottom line on BIDU: The potential US delisting is a new headwind for the stock as the company remains in a business transition during a potential recession in China. While the longer-term prospects for its footholds in China ecommerce and advanced technologies are strong, it's probably best to wait for the analyst estimates to stop going down and start heading back up. The Zacks Rank will let you know.
 
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