Baidu Bloodbath Post Q1: ETFs in Focus

Things are not working in favor of Baidu Inc. BIDU, which is considered the Google of China. The company’s adjusted first-quarter 2019 earnings of 41 cents per share were in line with the Zacks Consensus Estimate. However, the bottom line declined 78.6% sequentially and 84.2% year over year.

China’s largest search engine reported revenues of RMB24.1 billion ($3.59 billion), up 15% year over year. The top line rose 21% excluding revenues from divested business. Also, revenues marginally surpassed the Zacks Consensus Estimate.

“Continued spending on artificial intelligence and other next-gen technologies that have yet to reach the mass market” has probably dented the bottom line. The reported gross margin was 35.3%, significantly from the year-ago quarter.

Guidance

For second-quarter 2019, Baidu expects total revenues in the range of RMB25.1 billion (or $3.74 billion) to RMB26.6 billion (or $3.96 billion), indicating a year-over-year increase of (3)–2%. The Zacks Consensus Estimate for revenues was pegged at $4.34 billion.

Stock Takes a Hit

Baidu shares have slumped 23.5% in the past two days (as of May 20, 2019). Analysts continued to slash forecasts after the Internet-search company came up with disappointing earnings and downbeat forecasts.

The average forecast for the stock’s price over the next 12 months is now at $181 a share, down from $212 on May 16, before the Chinese company disclosed its first-quarter numbers, quoted on barrons.com. Analysts foresee a troublesome near term, though things may turn around in the medium term.

Baidu currently has a Zacks Rank #5 (Strong Sell). The stock comes from a bottom-ranked Zacks industry (bottom 43%)).

What Should be Your Stance on Baidu-Heavy ETFs?

Against this backdrop, we highlight a few ETFs that are considerably exposed to Baidu. Baidu has a sizable exposure (at least over 6%) in many Internet and China-based funds like First Trust Dow Jones International Internet ETF (FDNI), Global X MSCI China Communication Services ETF CHIC, Invesco China Technology ETF CQQQ and Golden Dragon Halter USX China Portfolio PGJ. This suggests that the performance of these funds is highly dependent on Baidu.

Though these ETFs are exposed to certain losses given Baidu’s condition, many of these have a Buy rating. This is because strength of other components could outweigh Baidu’s underperformance in the near term.

Below, we have highlighted four funds that have significant exposure to Baidu.

FDNI in Focus

The stock under review, Baidu, occupies the third position in the basket with 7.52% of assets.

CHIC in Focus

Baidu takes the fourth position, with about 7.05% exposure. The fund has a Zacks Rank #2 (Buy).

CQQQ in Focus

Here also, the in-focus Baidu takes the fifth spot in its 70-security basket with a 6.52% share. The fund has a Zacks Rank #2 (read: China's 2018 GDP Growth 28-Year Low: ETFs That Lost the Most).

PGJ in Focus

Baidu holds the fifth position, with about 6.48% exposure. The fund has a Zacks Rank #2.

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Baidu, Inc. (BIDU) : Free Stock Analysis Report
 
Invesco China Technology ETF (CQQQ): ETF Research Reports
 
Invesco Golden Dragon China ETF (PGJ): ETF Research Reports
 
Global X MSCI China Communication Services ETF (CHIC): ETF Research Reports
 
First Trust Dow Jones International Internet ETF (FDNI): ETF Research Reports
 
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