BIDU – Baidu Update

Over the past few months, Baidu (BIDU-NASDAQ) saw its stock price plunge from over $270 to under $230 before climbing above $240 yesterday.

Following better than expected Q3 results but a less than stellar Q4 guidance, some institutional investors have reduced their positions as the likelihood of a material earnings beat continuing from the disposal of the delivery business was lower than expected for some. We believe given the pull-pack in the stock and the recent increase in buying, we believe now is a good time to re-enter the stock.

The guided revenue for Q4 2017 accounts for the spinoff of its food delivery business in Q3 2017, as well as some impact from iQiyi reducing content for popular shows during the 19th Party Congress in China.

However, excluding revenues from iQiyi and disposed businesses, revenue is expected to grow 28% Y/Y in Q4 versus  26% Y/Y in Q3. In other words, we continue to see strong growth for core search business. Meanwhile, iQiyi is still going to show 40% increase Y/Y in Q4, despite consistent growth over 50% Y/Y for each previous quarters in 2017, according to management.

The biggest impact to the stock as we have metioned is EPS growth. Down to the bottom line, we are forecasting adjusted EPS of ¥15.56 for Q4 2017 or US$2.37 using an exchange rate of 6.6. This is a 15% beat versus a consensus estimate of $2.07.

In terms of our sum-of-the-parts model, we see upside of about 10% driven by both the search business operating income and to a lesser extent iQiyi revenue as valuation begins to look at 2018 EPS.

 Exhibit 1 – Baidu Sum-of-the-parts Model

While fundamentals are making this appear to be a slight buy, technicals up until this point had appeared  range bound between $225 to $240. With the stock price surpassing $240, on a technical basis the stock has moved from a neutral to a buy.

Taking into account all of these factors, we are shifting Baidu from a hold to a buy.

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