Baidu (BIDU) Is Sinking Like a Rock; Is Alibaba Next?

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Baidu (BIDU) stock is in the dumps today, plunging as much as 17% after a lackluster second-quarter report and third-quarter guidance that left much to be desired. Analysts raced to downgrade the stock and lower their price targets as BIDU stock hit 52-week lows in the bloodbath.

Baidu (BIDU) Is Sinking Like a Rock; Is Alibaba Next?After a stellar 2014 — BIDU stock rocketed 31% higher — shares are now down roughly 28% in 2015. I’m tempted to remind myself that “what goes up must come down,” but then I look at Berkshire Hathaway (BRK-B, BRK-A) and shut my mouth.

Let’s take a look at why the BIDU stock price is plunging so violently today, and why it could foreshadow darker days ahead for Alibaba (BABA) stock.

A Cardinal Sin for Growth Stocks

Yesterday, markets were under the distinct impression that Baidu was a growth stock. Growth stocks aren’t complicated. They harbor no ulterior motives. Their job is to grow; and for growing, institutional managers reward them with unjustifiable and offensive valuations. See: Netflix (NFLX).

To be fair, Baidu did grow Q2 revenue 38.4% to $2.67 billion, the exact amount Wall Street expected. Fine. But it missed on earnings per share, which came in at $1.81 vs. consensus $1.87 estimates. Then the Chinese search company guided for revenue of $2.93 billion to $3 billion, below the $3.02 billion consensus.

Growth stocks — the ones that want to remain growth stocks at least — don’t do that, Baidu. Maybe you didn’t know, but there’s a formula for that: beat, raise, repeat.

Of course, not all of today’s brutal selloff can be put squarely on BIDU. The Chinese stock market is in what you might call a Wile E. Coyote phase — it’s run off a cliff but hasn’t looked down yet, although gravity inevitably wins out.

But what peeved analysts even more than the disappointing EPS and guidance was the company’s guidance on selling, general and administrative expenses, which Baidu’s CFO casually mentioned would be jumping between 80% and 90% in the second half of the year. (Previous guidance was for a 50% increase).

Deutsche Bank, Pacific Crest and Brean Capital all downgraded BIDU stock instantly.

You can understand why an unannounced spending spree of that magnitude might not be too popular with BIDU investors or analysts. That said, it’s not exactly a secret that Baidu is entrenched in an all-out spending war against Chinese tech rivals Alibaba and Tencent (TCEHY). Forbes wrote a multi-page article about the spend-happy trio in its June 15 issue.

Although the Forbes piece focused on how BABA, BIDU and TCEHY were gobbling up small mobile-focused startups in Silicon Valley, it’s nonetheless clear cash is burning a hole in their pockets.

Like a nuclear arms race, BABA has no choice but to match or one-up BIDU if it’s still playing the game. And for investors, there’s no good ending to that game. (Three-way auctions between deep-pocketed, vicious competitors rarely end with the winner paying a fair price.)

If I were Baidu CEO Robin Li, I would encourage the company to splurge on only one thing this year: Ruth Porat, the cost-conscious CFO of Google (GOOG, GOOGL). She’ll make about $30 million this year in Mountain View, so I’m sure a modest raise of, say, 80% to 90% would be enough to woo her.

Yeah, $55 million to start should do it. Peanuts.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/bidu-stock-baidu-baba/.

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