Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member., Inc. (ADR) (BIDU): Is This Fundamental Trend a Silent Stock Killer?

Page 1 of 2, Inc. (ADR) (NASDAQ:BIDU), Inc. (ADR) (NASDAQ:BIDU) is exploding with gains; the company’s revenue is rising, yet investors ignore areas of caution that are abundantly clear. These areas of caution are affecting the entire space, which you should consider before investing.

3 Metrics of Concern, Inc. (ADR) (NASDAQ:BIDU) is essentially the Google Inc (NASDAQ:GOOG) of China, has risen 35% in the last month, and is currently trading higher by 8% after its second quarter earnings beat. For the quarter, Baidu grew its revenue 38.6% year-over-year to $1.23 billion and posted an EPS of $1.26; this was $32 million and $0.05 better than the consensus, respectively.

Baidu’s robust revenue growth is not a problem for investors. However,, Inc. (ADR) (NASDAQ:BIDU) is facing a substantial overhang with costs, and the price paid to acquire traffic. In particular, three metrics create a reason for concern: traffic acquisition costs, SG&A, and R&D.

Baidu’s traffic acquisition cost is the price it pays to increase site volume. This metric is the single greatest threat to Baidu’s operating margin, as it’s determined by a percentage of revenue. For example,, Inc. (ADR) (NASDAQ:BIDU) spent 8.3% of its revenue in the second quarter of 2012 acquiring website traffic.

This last quarter, the cost rose to 11.6% of revenue, which was up from 10.2% in the first quarter. This continuous rise will cut into the amount of dollars per $100 that Baidu earns as a profit, which affects margins.

In addition, Baidu’s SG&A rose 83.5% to $175.7 million and R&D rose 72.6% to $153.4 million, both year-over-year for the second quarter. The problem is that both costs are growing faster than revenue, and combined with the rise of traffic costs, Baidu faces turmoil in trying to maintain its industry-best margins., Inc. (ADR) (NASDAQ:BIDU)’s valuation is largely tied to its margins. Baidu has reported operating margins of 46.5% during its last 12 months. With the company trading at 10 times sales, the stock is expensive relative to a technology sector that trades at 3.2 times sales. Therefore, Baidu’s margin woes could be an overhang as the quarters progress.

An Industry Concern

While Baidu’s margin outlook may look dim, it is not just Baidu that faces these issues, but rather many companies that trade in its technology space. Many of these Chinese tech companies mimic successful U.S. companies. These companies have high valuations, rapid growth, and margin pressure.

Qihoo 360 Technology Co Ltd (NYSE:QIHU) is one of the most liked companies on Wall Street. The company sells anti-virus products but also earns revenue through advertising and Internet search. The stock has traded higher by 300% over the last 12 months, and trades at 19.25 times sales.

Investors have flocked to Qihoo because of its growth. During Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s last quarter, revenue grew almost 60% year-over-year. However, like, Inc. (ADR) (NASDAQ:BIDU), the company’s acquisition of traffic, and its overall operating expenses are growing faster than sales.

For Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s last quarter, the cost of revenue was $13.9 million, which was an 82.7% increase over the prior year, and a 30.6% rise from three months prior. The company’s total operating expenses were $89.2 million, a near 90% year-over-year rise. Combined, this shows that while Qihoo is a growth company, its expenses are also racking up, and margins are falling lower.

Page 1 of 2