Baidu (BIDU) , the Alphabet (GOOGL) of China, says the bad news is beginning to come to an end, significantly shifting sentiment on the Street.
Shares of the Beijing-based tech giant have run nearly 20% this week, building on a more optimistic tone in trade talks and earnings results that have suggested much of the pain has already been priced in.
"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," 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."
The idea of the temporary tamp being just that, temporary, and earnings that beat strongly on top and bottom lines and showed positive user growth has quickly reversed share trajectory after the stock was more than halved in the past year.
Looking to the road ahead, CFO Herman Yu encouraged yet more optimism for long term shareholder that have been among the most hurt by the trade tensions and "growing pains" in the business.
"Our emphasis on improving search and feed monetization is in progress, we witnessed double-digit sequential revenue growth in the second quarter and expect further sequential growth into the third quarter," he told analysts. "Our focus to diversify away from traffic and grow search revenues to in-app search and feed is proving to be a dominant search model and in-app services allow us to gain more user insight across mass domain of knowledge, content and services and continuously improve our user engagement for both Baidu and our marketing services customers."
He added that progress in AI is significant and should open more shareholder value in the future as users continue to come to the platform and the prospects of autonomous driving become more prescient.
"On Baidu's AI businesses, DuerOS voice assistant continues to experience strong momentum with installed base surpassing 400 million devices," Li said. "As mobile internet penetration in China slows, we are excited about the huge opportunity to provide content and service providers a cross-platform distribution channel beyond mobile, into smart homes and automobiles."
He noted that even amidst the slower environment, the daily active users on the platform increased by tens of millions in the major population center.
"We believe Baidu Core demonstrates strength in user acquisition and drives engagement and ROI through mini-programs and structured data initiatives in medical," Jefferies analyst Thomas Chong commented. "With the shares down 30% YTD, macro-headwinds and competition look priced in."
As a result, he still sees shares undervalued at the potential inflection point at present, causing him to reiterate his "Buy" rating on the stock.
Still, with no firm end in sight to the ongoing trade war and weakness in the company's iQiyi (IQ) video streaming subsidiary and the need for sustained spending in the current environment, there is room for caution on the Chinese company.
"While the share price might react positively to the print on profit beat, we remain fundamentally cautious on Baidu's ads outlook in 2H19," J.P. Morgan analyst Alex Yao warned. "We have identified no solid evidence to support the widely held optimism of an online ad recovery in 2H19. We therefore think it is too early to look through 2019 and to bottom-fish Baidu given the low visibility for its core ad revenue recovery and potential further estimate cuts in 2H19."
Indeed, while the Wall Street consensus remains a "Buy", price targets have been cut across firms as many remained unconvinced that macro worries and slowdowns in certain segments are suddenly rolling off.
At the very least, there is reason not to chase even for contrarian investors looking to cash in on the other end of the trade war.
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