Baidu, China’s dominant internet search company, announced on Thursday a $1 billion share buyback programme to pacify investors after $12 billion was wiped off its market value on disappointing second-quarter earnings.
The shares will be repurchased on- and off- the open market over the next 12 months and be funded through Baidu’s existing cash balance, the New York-listed company said in a statement. The company has a total of liquid assets about $12 billion.
The announcement, which marks Baidu’s first buyback in nearly seven years, comes after the company on Monday announced its worse-than-expected quarterly results. Meanwhile, it also unveiled plans to ramp up spending on the fast growing but costly online-to-offline (O2O) business, which connects online consumers with offline services. Its stock tumbled by nearly 15% the next day on the release.
“The buyback demonstrates Baidu’s confidence in the O2O opportunity, and in our ability to capture it,” Baidu’s spokesman Kaiser Kuo told FinanceAsia in an email.
The company says its board has authorized the repurchase but will review it periodically for potential adjustment in size and terms.
In recent years, Baidu, best known for its dominant search engine in China, has been diversifying businesses beyond its profitable core search services by investing heavily in the O2O market, the primary driver for its long-term growth, with a goal of catching up with domestic rivals Alibaba and Tencent.
Last month, Baidu’s founder and CEO Robin Li revealed an ambitious plan to invest Rmb20 billion ($3.2 billion) over the next three years in Nuomi, a Groupon-like lifestyle platform which Baidu acquired last year. The online marketplace provides services such as cinema tickets sales, food delivery and restaurant booking.
In spite of the fierce price war in China’s O2O business, market insiders says Baidu has been positioned in the right territory, as the opportunity is enormous thanks to the country's densely-populated cities and growing middle class.
According to an HSBC estimate, the Chinese O2O market is [worth] Rmb10 trillion and will continue to grow following its “very strong initial success”.
“This is the step Robin Li must take,” Wang Guanxiong, a tech expert and former software director with Alibaba, told FinanceAsia. “Yes, it [the investment in O2O] ‘burns’ loads of money. But if you don’t burn it, you will fall behind [your rivals].”
Baidu knows well how costly the new business is as it eroded operating margins by 25.3% in the second quarter of this year — a drop-off that triggered concerns from investors and financial analysts.
“We expect the share price to remain under pressure unless Baidu can show accelerated market share gain for its O2O initiative and successfully reduce spending with a resulting margin rebound towards the end of 2016,” wrote a Barclay's analyst in a note on Tuesday.
The company’s second-quarter profits were up 3.3% to Rmb3.66 billion ($591 million) year-on-year as its 38% revenue growth was mainly offset by higher spending.
A share buyback programme is generally good news for investors, as it shows management confidence in the company’s business strategy and helps reduce the number of shares outstanding and boost stock price.
Baidu’s move is in line with similar stock support measures by international and domestic tech peers. In April, Apple said its ongoing share repurchase programme had increased to $140 billion, up from $90 billion last year. The buybacks, which started in March 2012 and are scheduled to be completed in March 2017 have resulted in its stock appreciating by about 45% since then.
However, market observers say although Baidu’s buyback plan showcases its determination to expand O2O, the positive impact on share price could be limited.
“[Baidu]’s focus on long-term O2O strategy will hurt short-term performance,” said analysts at China Construction Bank International. “We advise investors to await a better entry point.”
Wang Guangxiong, the tech expert, agreed. “Investors won’t [easily] have confidence in a company just because it buys back its own shares,” he said. “[Financial results] matter more to them.”