Why Baidu's China 'Local' Opportunity Keeps It Worth $200 Per Share

Courtesy of Benzinga.

In a report published Monday, Oppenheimer analyst Jason Helfstein maintained an Outperform rating on Baidu, Inc. (ADR) (NASDAQ: BIDU), while lowering the price target from $230 to $200 due to the company's local ad spending plans.

The analyst, however, commended Baidu's share buyback initiative worth $1 billion, which would entail large return of capital to shareholders versus the local advertising initiatives, on which the company intends to spend $3.2 billion.

"BIDU is willing to bet $3.2B to garner part of a $99B opportunity in local advertising," the Oppenheimer report said.

The company announced its 2Q15 results, with the Non-GAAP EPS in-line with the estimates, although the margins were below consensus due to local spending and increased headcount. The revenue growth of over 38 percent year-on-year was in-line with the estimates and the consensus. Gross margins grew 262 bps, driven by TAC and content costs.

The company also announced disappointing Q3 guidance, with revenue growth guidance below the consensus forecast. The management attributed the weak guidance to the continuing mix shift to mobile. Baidu also expects SG&A to increase 100 percent, year on year, in 2H, as compared to 65 percent in 1H.

With regard to the local opportunity in China, Helfstein said, "Chinese consumers have very limited access to high-quality products at reasonable prices due to the underdeveloped infrastructures."

"Combined with fragmented retail chains, especially in lower-tier cities where a growing middle class is driving China's consumption power, we see significant demand for local online lead generation," Helfstein added.

The 2015 revenue, non-GAAP EPS and non-GAAP margin estimates have been lowered, along with the 2016 non-GAAP EPS and margin estimates, to reflect the increased SG&A.

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