Topic: What metrics should be investors' focus when reading Baidu's Q3 2007 earnings report? Are there any historical patterns?
Data: Below is Baidu's earnings history since its IPO. The following metrics (highlighted rows in the table) deserve special attention: 1. By how much did actual revenue beat or miss the Wall Street consensus? 2. By how much did next quarter revenue guidance beat or miss the consensus? 3. Price action on the trading day following the earnings announcement.
Table: Baidu (BIDU) Earnings History Since IPO
Source: Yahoo! Finance, Reuters, and company reports
Analysis: Based on the data above, we found the following patterns:
1. Next Quarter Revenue Guidance Is the Key. This metric shows Baidu's business outlook for the next quarter. When the next Q revenue guidance beat the Wall Street consensus (3Q05, 4Q05, 1Q06, 2Q06, 1Q07, 2Q07), the stock went up the next day 4 out of 6 times. When the next Q guidance missed the consensus (3Q06, 4Q06), the stock declined both times. We believe this metric is the BEST indicator for next-day performance with a 75% hit ratio (=6/8). And we suggest that investors pay most attention to this metric, which will be located in the "Outlook for Fourth Quarter 2007" section of the Q3 earnings press release.
2. Revenue Is Somewhat Useful. For the first three quarters (3Q05, 4Q05, 1Q06) after IPO, Baidu's revenue easily beat the consensus by at least 10%. The stock was up 2 out of 3 times after earnings. In the next three quarters (2Q06, 3Q06, 4Q06), Baidu barely beat or met consensus (1.9%, 0.5%, 0.0%). As a result, the stock dropped next day in all these three quarters. In 1Q07 and 2Q07, Baidu reversed the tide, beating consensus by 3.7% and 7.0%, and for both quarters the stock climbed on the following trading day.
3. EPS Is Less Important. For 6 out of 8 quarters, Baidu handily beat EPS consensus. For the two quarters (1Q06 and 1Q07) it failed to do this, the stock actually went up (37% and 14%) after earnings report. The implication is that BIDU is generally not impacted by whether or not it beats EPS consensus. An explanation for this is: China's paid search market is still in its early, high-growth stage. Therefore, growing revenue market share is the focus for both Baidu and investors.
Conclusion: For Baidu's Q3 2007 earnings report, investors should focus on two metrics: whether Q3 revenue beat consensus, and whether Q4 revenue guidance beat consensus. We have highlighted them in the table above.
Other reports in our Baidu 3Q07 Preview Series:
(1): Baidu Maintained 4-1 Traffic Lead Over Google China
(2): Search Queries Increased 4% vs. Q2
(3): Baidu Expanded User Market Share to ~70%
(4): Baidu Has 2x Google China's Advertisers
(6): Baidu Q3 Revenue Estimated to Be $66.7M by Analysys International
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