The Troubling Implications of Baidu Stock Earnings

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A little good news for those of you who were holding Baidu (BIDU) as of Monday’s close and watched Baidu stock fall 15% on Tuesday morning … the company has approved a sizable buyback. All told, the Chinese search engine outfit says it will repurchase up to $1 billion worth of Baidu stock over the course of the next 12 months.

Something Troubling for Owners of Baidu Stock to MullIt was a well-received announcement, judging from the 2.5% bounce from Baidu stock today.

Even though the $1 billion allocated to the buyback only represents 2% of the company’s entire market cap, it’s an important show of confidence following Baidu stock’s plunge in the shadow of a major meltdown from most Chinese stocks.

And yet, the bigger question remains — why didn’t the market and/or analysts realize disappointing Q2 numbers were on the way from Baidu, and from most Chinese stocks?

Take a Closer Look at Chinese Stocks

To put it bluntly, many Chinese stocks — and e-commerce names in particular — have been given something of a pass regarding second-quarter earnings and/or third-quarter outlooks, with the 32% tumble from the Shanghai Composite between June 15 and July 7 garnering more attention than these companies’ shortcomings.

Case in point: Aside from BIDU, E Commerce China Dangdang (DANG) missed earnings estimates with its late-May quarterly report, Sohu.com (SOHU) managed to top estimates but is now fending off surprisingly high expenses, while Changyou.Com (CYOU) shares took a big hit after investors realized that its growth rate is slowing.

Certainly a tumbling stock market could have spooked Chinese investors, many of which are new and relatively experienced, and unaccustomed to dealing with corrections. The correction of Chinese stocks as the catalyst for the trailing and future tepidness from these companies, however, simply doesn’t hold water.

Above all else, the Shanghai Composite was rallying — significantly — for the bulk of Q2. If anything, Chinese investors flush with new (even if unrealized) gains should have been feeling increasingly confident through the majority of the calendar quarter.

And, even if a pullback was a reason for business and personal consumption to suddenly be stifled, the selloff of Chinese stocks didn’t reach a scary stage until after the beginning of July — well after the data for these reports was compiled.

Investors Had Warnings

So if not its market implosion, what wall did BIDU, CYOU, DANG, and most other Chinese stocks hit last quarter that nobody saw coming? Two words: Economic weakness.

The signs were there all along, buried under the headlines about how hot Chinese stocks are (or were), and how they were a must-have part of any smart portfolio.

Alex Frangos of the Wall Street Journal connected the dots on May 13. In his piece “China’s Economy Not Getting High on Stimulants” he plainly points out that April’s industrial productivity growth of 5.9% in China was the second-slowest monthly growth pace since late-2008.

Reuters’ Peter Thai Larsen came right out and said it his April 15 headline, “China’s stock market is poor proxy for its economy,” and then went on to explain that China’s industrial productivity was down in March, as were retail spending and investment.

Perhaps the best and most insightful assessment came from The Economist in an article posted on April 15. It said, “As the capital of Henan, one of the country’s poorest provinces, Zhengzhou had anchored the country’s last, large, fast-growth frontier. Its maturation signals that the slowing of China’s economy is not a cyclical blip but a structural downshift.”

The warnings were there. Most just chose not to see them, too distracted by what was ultimately a doomed rally.

Bottom Line for Baidu Stock

As for BIDU, like most other Chinese stocks, it was bid up over the course of the first half of the year on the (erroneous) assumption that the tepid economic data offered early in 2015 didn’t mean anything, since the nation-state’s government would soon fix what was broken and rekindle growth.

As yours truly here explained on June 29, though, there’s little evidence yet that any of the stimulative efforts China’s government have put into place have spurred activity that would actually increase corporate earnings … the one thing that actually could boost Chinese stocks at this point.

In other words, though Baidu stock clearly has value in that the underlying company is still functioning, it’s tough to view it — or price it — as a growth story right now just because China’s economic growth is waning fast.

The buyback can’t change or overcome the nagging reality that nobody really knows how bad China’s slowdown will get.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/something-troubling-owners-baidu-stock-mull/.

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