The only thing more certain than death and taxes is change. This seems to be particularly true when it comes to Chinese companies. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) stock has been absolutely crushed on concerns about new competition from companies like Qihoo 360 Technology Co Ltd (NYSE:QIHU), and slowing growth. I’ve owned Baidu in the past, and my initial reaction to these threats was to dismiss them out of hand. Baidu is the leading search engine in China, and the country’s Internet population is relatively small compared to the total population. Unfortunately, my initial assumption that these threats were no big deal falls wide of the mark. Baidu is a company in transition, and investors need to adjust their expectations accordingly.
A scary decline
One of the hallmarks of Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s story was the company’s almost ridiculously high revenue growth rate. Just one year ago the company’s revenue was increasing by more than 80%. In the most recent quarter, the company reported revenue growth of 41.6%, which is still very impressive. However, there is a clear pattern of decline between the two points, and the story the following chart tells is scary:
As you can see, Baidu’s revenue deceleration has followed a nearly perfect 10% drop on a quarter to quarter basis. If a statistician were using this chart for forecast, they might suggest 30% revenue growth is next. Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s management is suggesting revenue growth of at least 38.1% next quarter. Even if the company meets this expectation, it would only suggest a slower rate of decline in the future, but would not break the downtrend.
What is really interesting is, if Baidu’s revenue growth continues to decelerate, they may find themselves growing at a pace similar to their competitor Sohu.com Inc (NASDAQ:SOHU), which is expected to grow revenue by 21.70% this year. Ironically, their biggest new competitor Qihoo 360 Technology Co Ltd (NYSE:QIHU) is expected to grow revenue by 42.57%, and Google Inc (NASDAQ:GOOG) is also expected to grow revenue north of 40% this year. If Baidu slows, and these two companies meet estimates, they may both outpaceBaidu.com, Inc. (ADR) (NASDAQ:BIDU).
An even scarier decline
While revenue growth has been dropping by about 10% per quarter, Baidu’s operating profit is moving south at an even faster rate. In the last five quarters, Baidu’s operating profit growth has dropped from over 80% to less than 30%. What’s worse is the pattern of this decline. Look at the chart and see if you notice the same pattern I do:
What I notice is the decline is less than 10% in two of the quarters, but nearly 30% in two of the quarters. If this trend continues, Baidu may see a small decline next quarter, but by the second quarter of 2013, the company’s operating profit growth may decline to near zero.