Baidu Inc (ADR) (NASDAQ:BIDU) is scheduled to report its fiscal second quarter results on Thursday, July 24. The Chinese Internet giant has registered solid growth in the past several quarters, and that momentum is likely to continue. However, Baidu has previously stated that 2014 will be a year of investment, warning that share could be little or no growth in earnings this year.
Heavy investments would hurt Baidu’s operating margins
Wall Street forecasts the Beijing-based company to report earnings of 8.17 yuan per share on revenues of 11.95 billion yuan. Baidu had earned 7.52 yuan with 7.56 billion yuan in revenues in the same quarter last year. Deutsche Bank analysts Alan Hellawell and Vivian Hao said in a research note that they expect the company’s revenues to surge 59.3% YoY to 12 billion yuan ($1.94 billion). Non-GAAP operating income is expected to rise 5.7% YoY to 3.2 billion yuan ($520 million).
Baidu is investing aggressively to expand its business in other categories. The company is paying smartphone vendors in China to pre-install its apps on new devices. Initially, the pre-install program was limited to its native search and mapping apps. But the company is expanding it to include security, app store and other apps. These investments are going to hurt Baidu’s second quarter non-GAAP operating margins.
Mobile to drive Baidu’s top line growth
Deutsche Bank forecasts the search engine company’s operating margins to decline 13.3 percentage points YoY to 26.4%. Hellawell and Hao believe that the mobile business will drive Baidu’s top line growth. Adoption for mobile search ads is increasing. Baidu’s cost-per-click gap between mobile and PC is narrowing. PC paid clicks remain resilient on better click-through rates and algorithmic improvements. Deutsche Bank expects Baidu’s top line to meet or beat the high-end of the guidance.
Though Baidu is expected to report a 13.3% YoY and 0.6% QoQ decline in operating margins, there is still room to surprise investors. Better than expected results at the company’s travel search site Qunar, and under-spending on marketing and video content could deliver an upside surprise. Deutsche Bank maintains its Buy rating on the stock with $229 price target.
