The naysayers are growing when it comes to Baidu (NASDAQ: BIDU). There were 5.3 million shares of China’s undisputed search engine leader sold short as of mid-May. We’re a far cry from the 7.2 million shares that were shorted a year ago, but 5.3 million is still a large enough number to stand as the highest short interest at Baidu since mid-October of last year.
The pessimism seemed warranted at first. The stock would go on to plunge 15% through three trading days after its COO announced he was leaving the company. He had only been at Baidu for a year. However, with the stock clawing its way back in recent days to make back most of that decline — and closing in on a new all-time high — one has to wonder if betting against Baidu is the best move at the moment.
Betting against Baidu
There was a time when it was easy to wonder if Baidu’s dominance in desktop search would migrate to the smartphone realm. Baidu was initially seen as slow to react to the mobile revolution, but it’s been catching up in a hurry.
Baidu announced on Tuesday that its app is now reaching 150 million daily active users, a big milestone for the dot-com darling. Baidu’s brand when it comes to search has never been challenged, but its ability to succeed with a mobile application that serves up both search and personalized news feeds is important. Baidu claims that its mobile success validates its emphasis on artificial intelligence, something that critics may have started to question after losing another AI exec — Baidu’s own COO — last month.
The popularity of Baidu on mobile is also encouraging because it has shed a lot of cash-draining mobile-centric subsidiaries over the past year. Baidu sold off its food delivery service and its mobile gaming business. It also spun off its leading video streaming platform.
Baidu’s laser focus on search and AI is resulting in margin-expanding renaissance. Its operating profit and adjusted earnings more than doubled in its latest quarter, well ahead of the top line’s pace with revenue climbing 31% higher. The company’s guidance for all of 2018 — calling for 26% to 33% in revenue growth despite the absence of the deconsolidated business — suggests that the current pace is sustainable.
The revival on the bottom line is taking Wall Street by surprise. Baidu has consistently trounced analyst expectations, scoring double-digit percentage beats in earnings per share every single quarter over the past year. Baidu isn’t perfect, but it’s hard to bet against a company that’s growing despite selling off assets and blowing through Wall Street profit targets with ease in the process.
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