Baidu Inc: What’s Ahead for Baidu Stock?

Baidu IncIs This a Problem for BIDU Stock?

Investors in Baidu Inc (ADR) (NASDAQ:BIDU) had a bit of a shock last Friday: Baidu stock lost more than 2.2% on July 8 in early trading over concerns that new Chinese government online advertising rules would have an impact on the stock—a very bad one.

Right from the start, Baidu stock has already shown a recovery in pre-market trading, gaining 1.2% to reach $161.73, meaning Baidu shareholders have little to fear. Moreover, the new regulations have affected a number of Wall Street–traded Chinese stocks. This means Baidu’s significant—but not massive—drop last Friday did not result from any specific BIDU stock weakness.

In a heavily regulated but fast-changing market such as the Chinese stock market, investors have learned to deal with frequent changes in both the regulatory environment and investor behavior. Indeed, while the markets responded with a sense of surprise, the new set of rules from the State Administration for Industry and Commerce had been expected for more than a year. (Source: “Baidu, NetEase Fall As China Tightens Online Ad Regulations,” Investor’s Business Daily, July 8, 2016.)

The new regulations will go into effect next September. However, rather than fearing the regulations will negatively affect BIDU stock, investors should welcome them with open arms. The new rules, which include regulations targeting misleading practices, will make it more difficult to deceive the rapidly growing number of users in China. They will also ban ads for cigarettes and prescription drugs, while the government will have to approve any ads for medical supplies and health products among other items. (Source: Ibid.)

In a sense, if the Chinese government has called for the new, tougher regulations, it’s because Baidu has become so successful and sometimes, success has unintended consequences.

Last April, a Chinese student named Wei Zexi died from a rare cancer. Prior to passing away, Zexi accused Baidu of having misled him and his family with false medical information. He had sought and followed a new therapy using Baidu’s search engine after radiation and chemotherapy failed to cure his synovial sarcoma, a rare cancer affecting the major joints. Through Baidu, Zexi found a hospital that claimed to have a cure for his illness and the family spent upwards of US$30,000 on experimental treatments that were claimed to have a high success rate.

As this case suggests, clearly, the government had to enforce new regulations that will force companies like Baidu to deal more effectively with overly optimistic advertising claims. This form of advertising can be expected in an emerging economy, which too often promotes growth at the expense of ethics.

The new rules will force companies, especially medical companies, to identify their claims as “advertising.” This should gradually improve the kinds of companies using Baidu, reducing its risk in the long run.

As for Baidu stock, analysts have already absorbed the impact of the rules. Most analysts expect Baidu stock to reach the $205.00-per-share mark. The more optimistic analysts, however, see it reaching $223.00 per share. (Source: “Baidu, Inc. (NASDAQ:BIDU) Median Target At $215,” Markets Daily, June 26, 2016.) Those price targets imply gains of 40%.

The main takeaway for Baidu stock is a bullish one. Baidu is growing and Chinese regulations will not affect its popularity. Baidu, a.k.a. “China’s Google,” has ambitious plans that should spur future growth, including the development of a driverless car.