Why Baidu's Margins Are Still A Concern

• Baidu Inc (ADR) (NASDAQ: BIDU) shares are down 26 percent year-to-date, despite having risen 23 percent since October 1.
• Brean Capital’s Fawne Jiang maintained a Hold rating on the company.
• The company’s O2O investment is making headway but investment will continue to weigh on margins, Jiang stated.

Baidu has made good progress in its O2O effort, as is visible in its strong GMV growth Q/Q, analyst Fawne Jiang said. He added, however, that the key underlying challenges, including the potential prolonged investment cycle of educating users and transforming users from promotion driven to brand driven, remains.

The company’s earnings growth is likely to remain muted in the next few quarters, Jiang mentioned, while adding that the recent Meituan/Dianpig merger has also increased the competitive pressures for the industry. “

Baidu’s recent share exchange transaction with Ctrip.com International, Ltd. (ADR) (NASDAQ: CTRP) paves the way for its deeper penetration into the online travel market. Jiang expects Baidu to further capitalize on its strength in the travel segment and build local services around this core competency area.

The company’s future growth prospects are expected to be driven by its ability to bring in effective user behavior changes with O2O and sustainable user growth, besides improving monetization with better earnings growth visibility.

Baidu reported mixed 3Q15 results, with revenue and non-GAAP EPS falling short of market expectations. The company has guided to better-than-expected 4Q15 revenues, driven by continued growth in its search and online video businesses.