Baidu is still searching for local-services profits. China’s top search engine reported better-than-expected sales and rising margins on Feb. 25, lifting its shares by more than 10 percent. Pulling back from online travel helped boost profitability. Still, it is far more important that Baidu delivers on its costly and opaque bet on local e-commerce.
The results offered two big positives. First, Baidu’s core search business is still growing at a healthy clip, even if not at the warp speed it once did. The $56 billion web giant said quarterly revenue rose by a third year-on-year. Advertising sales, which make up 94 percent of the total, rose 27 percent to top 17.6 billion yuan ($2.7 billion).
Second, Baidu is benefiting from a corporate tidying-up. In October it swapped a controlling stake in loss-making travel site Qunar for a minority stake in a rival. That helped lift operating margins to almost 19 percent in the three months to December, compared to 13.7 percent in the previous quarter. A mooted sale of loss-making video site Qiyi raises potential conflicts of interest since the buyers would be Baidu Chief Executive Robin Li and his counterpart at Qiyi. But this could at least deliver a similar margin boost.
That said, Baidu’s losses from local “online-to-offline” services are a bigger issue. O2O ventures like group-buy deals, movie tickets and food delivery, plus the video platform, lopped 30.8 percentage points off overall Baidu’s operating margin.
The company last year committed 20 billion yuan over three years to its group-buy deals site. But fierce competition and abundant subsidies make profitability elusive. The company doesn’t break out financials for these O2O businesses. Nor has it yet explained what sort of sales and margins its local e-commerce bets can generate, or over what time frame.
Shares of Baidu now fetch about 28 times the $6.20 of earnings per share that analysts it to earn in 2016. That does not look especially cheap: the stock has traded on about 27 times forward earnings over the past two years. It is unlikely to attract a higher valuation without more clarity on O2O.