Baidu.com, Inc. (ADR) (BIDU), And Three Overlooked Details From Earnings

Baidu.com, Inc. (ADR) (NASDAQ:BIDU)It’s no secret that investors were pretty disappointed with the earnings report from China’s largest search engine, Baidu.com, Inc. (ADR) (NASDAQ:BIDU). Amid the earnings and revenue miss, however, I saw three things that long-term, buy-to-hold investors should be very encouraged by.

1. More businesses keep signing up
If you’re unfamiliar with how search engines make the bulk of their money, it works like this:

As users make more and more searches, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is able to collect more and more information about each individual user.

When searches are typed in, advertisements are displayed at different locations throughout the screen. The companies pay Baidu for these advertisements.

Because Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has collected lots of information about each user, the advertisements are fit to match the search history of each person.

By keeping an eye on how many businesses have signed up with Baidu.com, Inc. (ADR) (NASDAQ:BIDU), it becomes a little bit easier to get a feel for whether or not Chinese businesses are buying into this model. Based on the results, I’d say they are.

Source: SEC filings.

2. Investing where it counts
It can be somewhat disconcerting for investors to see their company increase revenue by 40%, but earnings per share only nudge up 9%. That’s understandable, but it is the natural arc of evolution that search companies have had to take — they are spending more money right now in order to solidify their position for the future.

Here’s what Jennifer Li, Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s CFO had to say about spending: “We remain committed to investing aggressively, particularly in marketing and R&D. By deploying resources in the most strategically important areas of our business, we’re confident we can build exceptional long-term value for shareholders.”

That’s short-term speak for “Listen, guys, we’re sacrificing short-term gains for long-term dominance.” That’s important, as China’s mobile and online advertising environment is similar to where the U.S. was a few years back.

Go back to 2011, when Larry Page retook the reins at Google Inc (NASDAQ:GOOG), the company was making similar remarks based on the need to expand capacity and to develop a strategy to monetize on mobile searches: “We expect that R&D expenses will increase … as a percentage of revenues in … future periods because we expect to continue to invest in building the necessary employee and systems infrastructures required to support the development of new, and improve existing, products and services.”

Since then, Google Inc (NASDAQ:GOOG) has been able to increase both revenue and earnings at healthy rates, and investors have been rewarded with a 50% increase in the stock’s price.

3. Worries about fraud
Never, at any point, has Baidu done anything to make me think that it has been guilty of fraud. But it’s impossible to ignore the amazingly long list of Chinese companies that have been guilty of it.

Of Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s previous 15 earnings reports, the company had beat expectations 14 of those times. And of those 14 beats, seven had been by $0.02 or less. I’m not saying that that, in and of itself, is a sign of fraud. But earnings statements can easily be massaged to show Wall Street what it wants to see — instead of accurately reflecting what’s going on inside the business.

Now that Baidu has reported two straight earnings misses, I am — paradoxically — more comfortable with the stock in terms of the reliability of its reporting.

What to do now?
Though no one likes to see their company miss expectations or increase spending more than revenue, such concerns ignore the bigger picture. Baidu still has a huge share of the market in China, and with competition from Qihoo 360 Technology Co Ltd (NYSE:QIHU), the time is right to spend the money to solidify the future.

Qihoo 360 Technology Co Ltd (NYSE:QIHU) simply doesn’t have the money to keep up with Baidu without taking on lots of debt. And even if Qihoo 360 Technology Co Ltd (NYSE:QIHU) wasn’t around, it’s smart to invest now. No one knows exactly where the current technological revolution will guide us, but using Google as a proxy, it’s pretty clear that its earlier investments are paying off for shareholders.

For these reasons, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is one of the three stocks I’m considering adding to my Roth IRA in May. Stay tuned to see if it’s my pick.

The article 3 Overlooked Details From Baidu’s Earnings That Make It a Buy originally appeared on Fool.com and is written by Brian Stoffel.

Fool contributor Brian Stoffel owns shares of Google and Baidu. The Motley Fool recommends Baidu and Google. The Motley Fool owns shares of Baidu and Google.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!