Baidu beats the Street thanks to ad sales growth – but is a new challenger on the way?
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Baidu beats the Street thanks to ad sales growth – but is a new challenger on the way?

Chinese internet giant Baidu beat analysts’ expectations on profit and revenue when it posted second-quarter earnings earlier this week thanks to a major increase in sales at its core business: online advertising. Often called the Google of China, Baidu is the unquestioned king of search in the country, and it appears to have mastered the complex regulatory potholes that are tripping up its competitors – as a result, Baidu’s fortunes have soared. But could they be about to face a new challenge?

Despite strong results, Baidu’s share price fell this week as Google announced plans to enter China

graph 0808 baidu

SOURCE: Yahoo Finance

Baidu said that online advertising revenue increase by 25% against the same quarter in the previous year to $4.23 billion. This was partly driven by its newsfeed product – a similar platform to Facebook’s feed. Revenue also rose by almost 25% against the second quarter of 2017, beating predictions of a 22.4% increase. Lastly, but by no means least, the company beat on earnings, which came in at 18.14 yuan per share – a 45% rise against consensus estimates of 13.4%!

While other online advertisers have fallen foul of China’s notoriously strict guidelines, Baidu has shown an ability to navigate them successfully. The company’s CEO Robin Li said: "We are able to maintain a high standard and a close dialogue with regulators. We've seen changes or fluctuations from time to time and we are able to cope with that going forward."

Despite all this positivity, Baidu’s share price dropped this week. Why? Because Google – the company to which it is often compared – announced plans to enter the Chinese search market. This is undoubtedly big news – few companies have the knowledge and power that Google has – but Baidu might not need to panic: after all, Google did used to be in China, and Baidu still had a 79% market share back then. This implies, as Dominion Investment Manager Christian Cole said in a note, that “Baidu beat Google on its own terms, a pattern we have seen across the Chinese ecommerce landscape.”

Disclosure

Dominion holds Baidu and Google in its Global Trends Ecommerce Fund.


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