Baidu.com, Inc. (BIDU): A Make it or Break it Quarter

Compared to Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s expenditure of 28.1%, Google’s expense of 19.91%, and Sohu.com Inc (NASDAQ:SOHU)’s 27.17%, Baidu.com, Inc. (NASDAQ:BIDU) looks pretty conservative. The problem is, this one line item increased by 77% on a year-over-year basis, and the company attributed this to an, “increase in promotional expenses.” With SG&A expenses nearly doubling the rate of revenue growth, earnings took a hit.

In a similar manner, the company’s R&D expenses were problematic last quarter. Baidu spent 13.58% of revenue on R&D. By comparison, each of their peers spent more, with between 13% and as much as 47% of revenue on R&D. The issue was not the current percentage of revenue, as much as the rate of increase, as R&D expenses jumped by over 82% on a year-over-year basis.

Last but not least, investors seem to be overreacting to the company’s higher traffic acquisition costs, as Baidu still only pays about 10% of advertising revenue for this item. Though Google Inc (NASDAQ:GOOG) is far more established, the company regularly pays between 25% to 26% on traffic acquisition. The difference between Baidu.com, Inc. (NASDAQ:BIDU) and Google is, Google Inc (NASDAQ:GOOG) has seen its traffic acquisition costs level out over the last few years, whereas Baidu has reported a relatively significant increase the last few quarters.

Foolish final words

Within the next few weeks, investors should find out if the Baidu growth story will continue. The investments in mobile make a lot of sense for the company’s future growth, but only if the company can maintain a reasonable level of expenditures.

If management spends too much money too quickly, the company’s earnings could suffer, and Baidu.com, Inc. (NASDAQ:BIDU)’s growth story could change dramatically. Investors seem to be giving the company the benefit of the doubt, but this next earnings release could be a make it or break it moment for the stock.

The article A Make it or Break it Quarter originally appeared on Fool.com and is written by Chad Henage.

Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google, and Sohu.com Inc (NASDAQ:SOHU). The Motley Fool owns shares of Baidu.com, Inc. (NASDAQ:BIDU) and Google Inc (NASDAQ:GOOG). Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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