VSChina’s regulatory crackdown on tech companies such as Baidu (BIDU) is now well documented. Baidu has fallen victim to the impacts of increased regulatory scrutiny from the Beijing government, and some analysts such as Tariq Dennison of GFM Asset Management predict Beijing’s continued enforcement of the technology could last up to 30 years.
But can this new environment enable Baidu to achieve its stated goals? Equally important, can it do it profitably? The Chinese tech giant is expected to release its second-quarter fiscal 2022 results before the opening bell on Thursday. China’s pressure on tech companies, like Alibaba (BABA), JD.com (JD) and Tencent (TCEHY), includes demands for better corporate governance, anti-competitive practices and better political posture.
These new operational requirements imposed by the SAMR also extend to requiring companies to increase their investments in the country, whether in the form of direct sales and marketing dollars or “strategic initiatives” investments. This has raised concerns among U.S. investors that Baidu‘s core marketing business may not develop as expected, and it may not be able to accelerate its growth in the cloud. Baidu shares over the past year have not produced the returns expected by investors.
However, stocks have rebounded strongly over the past three months, suggesting investors are now more willing to take a risk with undervalued Chinese tech companies. Currently trading at around $138, Baidu is discounted against its long-term potential. For that perceived value to count Thursday, the company needs to speak positively about its growth potential despite heightened regulatory scrutiny in China.
In the three months to June, Wall Street expects the Beijing-based company to earn $1.63 per share on revenue of $4.45 billion. That compares to the year-ago quarter where earnings were $2.39 per share on revenue of $4.84 billion. For the full year, ending in December, profits are expected to fall 3.6% year-over-year to $9.29, while revenue of $19.87 billion for the year as a whole would increase by around 20.8% year-on-year.
Often dubbed the “Google of China,” Baidu has a well-diversified business that is competitive in many high-growth areas. Besides being a leading technology/internet company, Baidu specializes in search engines, artificial intelligence cloud, smart devices and self-driving vehicles. The company’s two main business segments: Baidu Core and iQiyi. The first accounts for about two-thirds of income. The rest of the revenue comes from iQiyi which in 2013 Baidu bought a 56% stake.
The market is waiting for signs that China’s regulatory crackdown will have minimal impact. If Baidu can weather the storm, it will be a major boost to China’s tech recovery. In the first quarter, Baidu reported better-than-expected quarterly earnings and revenue, driven by strength in its core business, particularly non-online marketing and cloud services. However, Q1 revenue attributed to video streaming platform iQIYI was $1.15 billion, down 9% year-over-year.
The company reported adjusted EPS of $1.77 on $4.48 billion, beating estimates of 83 cents per share and $4.16 billion in revenue. Non-online ad activity grew 35% year-over-year to $903 million, driven by cloud and other AI-enabled business. Notably, Baidu AI Cloud grew 45% year over year in the quarter. The company also noted that adjusted EBITDA was $867 million, with an adjusted EBITDA margin of 19%, suggesting the company’s pursuit of higher-margin businesses is gaining momentum.
Now it’s back to back quarters of strong earnings that have generated tons of cash flow. Despite increasing regulatory headwinds, the company is executing and reshaping its business for the future. On Thursday, investors will want to see if these positive steps can continue.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.