Shares of Baidu (BIDU, 127.86, -25.84, -17%) have fallen to a near four-year low after the company missed first quarter earnings estimates and guided second quarter revenue below consensus.
Baidu is the leading search engine in China with two-thirds market share.
Management took a cautious stance on its core advertising business, calling for a more challenging online marketing environment near term, given softer macroeconomic conditions and tighter government restrictions on content.
First quarter revenue grew 15% to $3.6 bln or 21% excluding the impact of divestitures. Core Baidu revenue grew 8% to $2.6 bln, while revenue from its leading video business iQIYI (IQ) grew 43% to $1.0 bln.
However, content costs grew 47%, traffic acquisition costs grew 41% and bandwidth cost grew 39%. Aside from higher content costs at iQIYI, the company is investing in its voice assistant DueroS, a cloud computing business and autonomous driving unit Apollo.
As a result, adjusted EPS fell 84% to $0.40/share, missing estimates for the first time in eleven quarters.
User metrics for the company's various businesses are strong, but investors are more focused on financial results.
Baidu is investing in artificial intelligence (AI) and focused on growing its mobile business. Management said it will increase operational efficiency to cut costs as it continues to invest in growth endeavors.
To make matters worse, Baidu forecasted roughly flat revenue for the second quarter, 11% below estimates at the midpoint.
The entire Chinese internet sector is feeling Baidu's pain today. The number two Chinese search engine Sogou (SOGO) hit a new low while internet media company Sina (SINA) fell to a three-year low after Baidu warned about the difficult operating environment in the advertising business.
Baidu's earnings are now expected to fall 16% this year with revenue up 6%.
Baidu may dominate search in China, but its business is subject to strict censorship from the People's Republic of China within the great firewall.
With a $46 bln market cap, the stock trades at ~18x EPS estimates with a low-teens EV/EBITDA multiple. That represents a discount to mega cap technology companies Alibaba (BABA) and Tencent (TCEHY), but a premium to smaller Chinese internet companies and even a slight premium to Alphabet (GOOG/L), which is also investing in growth but growing the top-line faster as it dominates the internet in the free world.