(Bloomberg) – The quarterly turnover of Baidu Inc. shrinking 1% and their projections suggest that sales may slip again, as rivals like ByteDance Ltd. continue spitting at their core advertising business.
China’s leading search engine predicts sales of 26.3 billion yuan ($ 3.8 billion) to 28.7 billion yuan for the September quarter, compared to estimates of 27.62 billion yuan. The shares slipped as much as 8% in expanded trading after Netflix-style subsidiary iQiyi Inc. revealed that it was collaborating on a U.S. regulatory investigation into allegations by Wolfpack Research that it was inflating user numbers. Shares in iQiyi fell as much as 19%.
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Baidu is driving a gradual post-Covid 19 recovery in its home market, but at the same time is facing increasingly aggressive competition in media and advertising from the likes of Tencent Holdings Ltd. and ByteDance. The company diversifies sources of advertising revenue and invests in content for its Netflix-style iQiyi Inc. to keep users and marketers from migrating to higher formats like the latest app from ByteDance Toutiao and Douyin, the local equivalent of TikTok. On Thursday, Baidu said investment in technology and content will pick up.
“When we look at the budget distribution of advertisers, it seems that Douyin and Toutiao are most attractive to them, starting from about two years ago,” said Raymond Feng, a Shanghai-based analyst at Pacific Epoch. “With the increased investment in Baijiahao, Baidu is trying to get on that front and create more content that is more welcomed by users, which is necessary for Baidu to do that.”
What Bloomberg Intelligence says
Baidu’s 2Q online marketing sales were able to contract less than 1Q’s drop of 19%, as the company emerges from China’s worst coronavirus outbreak. The second quarter has been strong for advertising in the past season, and this time Baidu will benefit from playing handball in offline business activity and improving the sentiment of advertisers.
– Vey-Sern Ling and Tiffany Tam, analysts
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Baidu reported sales of 26.03 billion yuan ($ 3.75 billion) in the June quarter, against an average forecast of 25.7 billion yuan. Net income was 3.58 billion yuan, against the projection of 2 billion yuan. The board also approved an increase in its share sale program to $ 3 billion from $ 1 billion, effective through 2022.
Once the tour guide in desktop search, Baidu tries to adapt its business to the mobile era, but loses ground pieces to rivals like ByteDance. To compete, Baidu’s core mobile search service transforms into a platform that hosts a wide range of content from articles about its Baijiaohao publishing account to videos and live streaming, unlike Tencent’s super-app WeChat.
In the long run, the search giant is investing in artificial intelligence technology, and betting on its commercialization through smart speakers and self-driving cars. Revenue from new AI companies, including cloud and smart devices, grew in the second quarter by a double-digit percentage, the company said.
Emerging geopolitical tensions are another source of concern. Baidu’s apps were among dozens of Chinese services targeting India’s sweep ban last month, while U.S. entities will soon be blocked from dealing with TikTok and Tencent’s WeChat. The US Congress is moving closer to passing legislation that could effectively prevent Chinese companies from trading on US exchanges. Billionaire Baidu founder Robin Li told state media earlier this year that the company is considering re-registering in regions including Hong Kong.
Chief Financial Officer Herman Yu told analysts on a call that geopolitical tensions “have no significant impact” on Baidu’s business due to its limited foreign exposure.
“This positive progress, coupled with some temporary commitment, leaves us cautiously optimistic about the business climate in the second half,” Li said. “While COVID-19, geopolitical tensions and other phenomena plaguing the economy may continue to weigh, the opportunities that AI has presented to us are becoming increasingly exciting.”
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