Why Deutsche Downgrades Baidu And Merrill Has A Sell By Shuli Ren
China’s Google Baidu (BIDU) closed 1.6% lower to $187.74 after Deutsche Bank downgraded this stock to Neutral, lowering its price target by 8% to $201.
Baidu has promised to clean up its search platform after a university student died upon seeking medical help from a shaky hospital ad he saw on Baidu’s search platform.
Analyst Alan Hellawell thinks it will take a while for Baidu to clean up house and this process will drag on Baidu’s core earnings all the way to 2017:
Baidu’s platform clean-up should continue well through 4Q and into 2017. While large accounts are paying up 15-20% YoY on a CPC basis; smaller, performance-sensitive customers seem to be balking at declining search ROI, for alternative ad platforms such as Weibo.
We maintain our revenue and net income forecasts for FY16/17/18E, but cut PEG ratio on core search from 1.0x to 0.9x on weakened visibility.
Bank of America Merrill Lynch’s Kok Onn Yong is less kind, reiterating his Sell rating yesterday, saying now that Baidu’s core search business is not working, it will have to dig harder for new business initiatives, which to stock investors mean ground zero. He wrote:
Despite Baidu’s strong market position in the search business, we think it is in a disadvantageous position against the backdrop of PC-to-mobile paradigm shift and hence we expect it to be more aggressive in developing new business initiatives.
Further, as most companies it has invested in are still in their early stages of development, or marginal names in their respective areas, we expect it to spend heavily in order to establish market positions and compete with Alibaba and Tencent.
Yong sees Baidu to spend big on auto-pilot cars, high-quality video content and artificial intelligence.
Source: Barron's Asia
http://blogs.barrons.com/asiastocks/201 ... as-a-sell/
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