Why Baidu Is the Tech Giant That’s Most Vulnerable to a China Downturn

(Bloomberg) -- Baidu Inc., after falling well behind China's two internet giants, looks in danger of losing even more ground if the country continues its economic downturn.

The search giant, which reports results this week, could fare worse than rivals Alibaba Group Holding Ltd. and Tencent Holdings Ltd. because of its higher reliance on the advertising market, an increasingly competitive arena that tends to suffer with economic weakness. Alibaba's core e-commerce has proven more resilient than traditional retail and a deepening thrust into realms such as cloud services helps juice top-line growth. Tencent is the standout: it's gained more than 30 percent since an October trough, thanks in part to the cessation of a months-long business-busting freeze on new games.

Baidu's bread-and-butter advertising business is under siege -- not just from its two larger rivals, but also a crop of upstarts like Bytedance Ltd. that're siphoning off marketing dollars while depressing ad rates. It's banking on younger services like its newsfeed, Apollo autonomous driving system and DuerOS AI service to drive future growth. But while those units make up about a fifth of sales, they've yet to turn a serious profit for the tech giant.

“Revenue growth is slowest among major Chinese internet companies, even with its feed initiative,” David Dai, a Bernstein analyst, said in a report. He estimates Baidu's share of the ad market has dwindled to 21 percent versus Alibaba's 36 percent. “Longer term, we see opportunities with DuerOS and Apollo but would wait for clearer signs of both segments taking off.”

All that translates into a higher share multiple for WeChat-operator Tencent, which trades at about 34 times estimated current-year earnings. That outstrips Alibaba's 32, with Baidu's roughly 17 as of Friday bringing up the rear. Of the three, the search giant has the highest proportion of analysts tracked by Bloomberg with hold ratings: almost 28 percent, versus Tencent's 7 percent and Alibaba's 2 percent.

Read more: Baidu's CEO Warns of a Wintry 2019 as Chinese Economy Sputters

On Thursday, Baidu is expected to post its slowest pace of revenue growth since early 2017, at 11.8 percent. Net income is projected to plummet 32 percent, the biggest drop since late 2016 when a medical scandal forced the company to revamp the way it sold ads. Margins are dwindling as it ramps up spending on content to try and attract users to its newsfeed, short-video platform Haokan and Netflix-like service iQiyi, CICC analyst Natalie Wu told clients in a note.

“Macro headwinds for the overall online advertising sector and intensifying in-feed ad market competition could cloud 1Q19 revenue outlook and put near-term margin under pressure,” Karen Chan, an analyst with Jefferies, wrote in a note last month. “Our channel checks suggest overall online advertising market could see a noticeable growth slow-down” to about 15 to 20 percent in 2019, from 30 percent last year.

--With assistance from David Ramli.

To contact the reporter on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Edwin Chan, Peter Elstrom

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