Shares of China's Baidu pop over 8% after earnings beat as CEO says 'temporary pain' will pay off

Key Points
  • Baidu reported second-quarter earnings that beat market expectations.
  • It saw growth in its mobile product and streaming service while its core advertising business stabilized.
  • Shares popped over 8% in after-hours trade in the U.S.
Baidu beats expectations despite macro headwinds
Baidu beats expectations despite macro headwinds

Baidu shares surged over 8% in U.S. after-hours trade after it reported earnings for the second quarter that beat market expectations, as it managed to fend off newer rivals like TikTok parent ByteDance in the advertising space.

Here are the results for the June quarter:

  • Revenue of 26.3 billion yuan, or $3.83 billion, according to the exchange rate published in the company's earnings release. That represented a 1% year-on-year increase or 9% on the quarter. Revenue beat market expectations of 25.76 billion yuan.
  • Earnings per share of 10.11 yuan, beating estimates of 6.12 yuan. That was a 54% year-on-year decline but a more than 260% increase from the previous quarter.

Expectations were low. The stock had declined nearly 40% this year, and investors were concerned about the impact of rising competition and stricter censorship from the Chinese government on online videos which could hurt ad revenue.

But Baidu reported numbers that pleased the market. After posting its first loss since 2005 in the first quarter of the year, the Chinese internet giant returned to a net profit in the second quarter.

Its core advertising and marketing services business hit revenues of 19.5 billion yuan, decreasing 2% year-on-year but rising 12% on the quarter. Given that this makes up around three quarters of the company's revenue, the signs of stabilization were welcomed.

The search giant has also been criticized for its slow shift to mobile as consumers spend an increasing amount of time on so-called "super apps." These are products like Tencent's WeChat or Ant Financial's Alipay where a user can do a number of different things ranging from payments to ordering food — all within one app.

Baidu has also faced new competition from ByteDance, the owner of social media app TikTok, which recently launched a search product.

Robin Li, chief executive officer of Baidu.
Nelson Ching | Bloomberg | Getty Images

In the face of this competition, Baidu managed to post strong growth for its own mobile app, which contains everything from search to videos. Daily active users for its app reached 188 million in June, growing 27% year-on-year. In-app search queries grew over 20%.

Baidu's streaming service iQiyi also posted subscriber numbers of 100.5 million in June 2019, increasing 50% year-over-year.

"In the recent months, faced with severe external challenges and a weak macro environment, the company initiated a series of transformative changes, including organizational structure, personnel, and business consolidation," Baidu CEO Robin Li said in a letter to employees. "These changes have brought temporary pain, but the positive impact will be far-reaching, enabling a more solid and long-lasting future for Baidu."

Still, Baidu is not out of the woods yet, with headwinds in the advertising market likely to remain.

"I would say this quarter's results are just 'less bad' or better than investors feared," Xueru Zhang, senior analyst at 86Research, told CNBC. "The ad market still shows no signs of recovery. What Baidu can do is to improve its own products."

"At least (the) topline performance stabilized (in terms of) quarter-on-quarter growth, while year-on-year remains challenging in the second half of 2019," Zhang added.