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.
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.