Facebook & Baidu – Tough times.

Reasonable numbers but tough outlook.

Facebook

• Facebook reported reasonable results but I still don’t think that the market has fully appreciated the difficulty that the company is going to experience in the medium-term which keeps me cautious.
• Q3 18 revenues / EPS were $13.7bn / $1.76 compared to consensus at $13.7bn / $1.46.
• The better than expected profitability caused a short rally in the shares in after-hours trading that quickly evaporated as the company was quite cautious on the call.
• Facebook has found success with its decision to focus on user engagements and moving videos to its new Facebook Watch service within its app.
• At the same time, it is pinning a return to rapid growth through the development of the stories function in Instagram and its other apps where posts disappear after a certain period of time.
• I don’t think that this is how Facebook will be able to grow long-term, as all it is really doing is moving engagement from one medium to another.
• This is what it needs to do to keep revenues flat, but growth will require increasing engagement from users living more of their Digital Lives with Facebook.
• This is where Gaming and Media Consumption come in, but there is still a lot of work to do here before these activities are ready to take over the mantle of growth.
• Hence, I think that the short-term and the medium still look difficult which combined with the AI and privacy problems the company faces, leads me to remain cautious.
• There will be a better time.

Baidu

• Tough times continue at Baidu as the regulatory overhang in China is still causing difficulties and its Media Consumption service iQiyi is also experiencing difficulties having halved in value since the peak in July 2018.
• Baidu reported good results with revenues / adj-EPS of $4.1bn / $2.77 compared to estimates of $4.1bn / $2.45 but the guidance was cautious causing the shares to soften slightly in after-hours trading.
• Q4 18 revenues are expected at $3.7bn – $3.9bn compared to consensus at $4.0bn.
• In addition to gaming, other industries such as real estate and e-commerce have been affected, which have put a crimp on advertising spending causing the lower than expected forecast for Q4 18.
• The weakening of the Chinese economy has also not helped.
• Furthermore, poor profitability at its iQiyi media consumption service where its shares fell 12% in after-hours trading after margins worsened materially despite 48% increase in revenues.
• The net result is that Baidu is trying to shift away from being a digital ecosystem towards being a provider of AI and in that regard, the outlook is pretty good.
• That’s because it has been crunching data for 20 years which RFM has identified as a key factor in determining the best AI offerings at the moment.
• This is what makes Baidu interesting from an investment point of view as buying into AI remains extremely expensive elsewhere.
• Hence, for those willing to look past the issues with the other parts of the business, this is one to consider.