Under the double negative "strangling" of the loss in the first quarter and the departure of the veteran.$Baidu, Inc. (BIDU.US) $The share price fell about 25% in two days, and the market value lost nearly 90 billion yuan. At one point, the total intraday market value wasMeituan comments-W (03690.HK) $、$JD.com (JD.US) $Anti-overtake.

Obviously, from the point of view of market capitalization, Baidu, Inc. has fallen out of the ranks of giants of "BAT".$BABA (BABA.US) $、$Tencent (00700.HK) $The market capitalization gap has widened tenfold. Given Baidu, Inc. 's current situation, the ranking of "BMJ" may be more appropriate.

As for the first loss after listing, Yu Zhengjun, chief financial officer of Baidu, Inc., said that the loss in the first quarter had something to do with the company handing out red envelopes during the CCTV Spring Festival Gala. Baidu, Inc. sent out a total of 1.9 billion red envelopes during the Spring Festival. It said that although this strategy affected Baidu, Inc. 's short-term profit performance, it brought large-scale traffic growth for Baidu APP.

However, a detailed analysis of Baidu, Inc. 's real business situation shows that the problems faced by Baidu, Inc. cannot be solved by a mere 1.9 billion red packets.

DAU growth depends on high marketing expenditure

In the PC Internet era, Baidu, Inc. relies on search to become the absolute giant of the Chinese Internet. Today, Baidu, Inc. still maintains a strong dominance on the PC side. According to Huachuang Securities data, among the top 20 PCs with monthly active users, Baidu, Inc. occupies seven seats, of which Baidu, Inc. search ranks first.

But on the mobile side, Baidu, Inc. is obviously weak. Among the top 20 software with monthly active users, Baidu, Inc. occupies only four seats, and the one with the best performance$iQIYI, Inc. (IQ.US) $Ranked fifth, still lagging behind Wechat, QQ and Mobile Taobao. In order to narrow the gap with BABA and Tencent in the mobile Internet market, Baidu, Inc. officially changed its name to Baidu, Inc. in January 2018 to build a "search + information flow" advertising model on the mobile side.

Statistically, Baidu, Inc. APP's DAU grew steadily, from 137 million in the first quarter of 2018 to 174 million in 2019, an increase of 28% compared with the same period last year. However, it is worth noting that in the third quarter of 2018, Baidu, Inc. APP's DAU growth rate declined both year-on-year and month-on-month, and the month-on-month growth rate dropped directly from 8 per cent to 2 per cent, before gradually picking up in the last two quarters.

In fact, after entering the post-Internet era, the population dividend is exhausted and the traffic is shrinking gradually, while realizing the growth of DAU, it is often accompanied by huge marketing expenses. Combined with the specific data of DAU growth and marketing expenditure, it can better reflect the huge price paid by Baidu, Inc. to obtain user traffic.

It can be seen that Baidu, Inc. 's sales and marketing expenditure growth also slowed down in the third quarter of 2018, from 54% to 51%, but this led to a sharp decline in Baidu, Inc. 's APP DAU growth rate. In order to maintain the steady growth of DAU, Baidu, Inc. had to increase his investment in sales and marketing expenses in the last two quarters.

In the first quarter of 2019, sales and marketing expenses rose 93 per cent year-on-year to 6.1 billion yuan, which naturally included New Year's Eve's 1.9 billion red envelopes during the Spring Festival. The cost of obtaining user traffic as a percentage of total revenue is also rising, from 14.83% in the first quarter of 2018 to 25.31% in the first quarter of 2019.

This shows that after missing the best era of mobile Internet development, Baidu, Inc. APP also needs to pay a high cost if she wants to add new users. While Baidu, Inc. was still grabbing user traffic, Tencent, who had mastered the huge traffic at the C end, had already announced last year that he would enter the TO B industry Internet. Fortunately, the APP of Baidu, Inc. can channel each other, and the number of daily active users of good videos increased by 768% to 22 million compared with the same period last year.

Online marketing business remains in the doldrums

However, the biggest problem for Baidu, Inc. to record the first quarterly loss is not the huge cost to achieve user growth, but Baidu, Inc. 's low income and high income costs.

According to Zhitong Financial APP, Baidu, Inc. 's total income in the first quarter of 2019 was 24.1 billion yuan, excluding the global payment business and du Lesser Fullness of Grain business, which increased by 21% compared with the same period last year. Among them, online marketing revenue was 17.7 billion yuan, an increase of only 3% over the same period last year, seriously dragging Baidu, Inc. back. Other income was 6.5 billion yuan, an increase of 73% over the same period last year, mainly driven by the strong growth of iQIYI, Inc. and cloud business.

Although the revenue share of the online marketing business dropped to 80% in 2018 and again to 73.2% in the first quarter of 2019, it seems that diversification has been successful, but in fact, this is the growth and decline of the business, and the continued weakness of the advertising business has led to a gradual decline in the proportion.

As early as the second quarter of 2017, Baidu, Inc. 's individual online marketing customer revenue grew by 32% year-on-year, the highest level since 2015. However, the strengthening of regulation after the "Wei Jersey" incident has led to a continued downturn in Baidu, Inc. 's search advertising business, with a year-on-year decline in revenue growth for a single online marketing customer and negative growth by the fourth quarter of 2018.

When the search advertising business was in the doldrums, Baidu, Inc. went all out into information flow advertising, but Tencent and Jinri Toutiao have entered the market first by virtue of social and algorithmic advantages, resulting in increased competition and difficulties for Baidu, Inc. to raise prices. In the first quarter report in 2019, Baidu, Inc. did not mention the number of online marketing customers.

In fact, the online marketing business is easily affected by the macro-economy. When the environment is depressed, advertisers tend to cut costs and reduce advertising investment, resulting in a weak demand side. And the supply side in order to rob customers, it is often difficult to raise prices, or even shrink in both quantity and price.

Revenue costs remain high

Although the income growth is low, Baidu, Inc. 's income and cost has increased significantly.

According to Zhitong Financial APP, Baidu, Inc. 's income cost was 14.839 billion yuan in the first quarter of 2019, an increase of nearly 50 per cent year-on-year. Among them, the content cost was 6.157 billion yuan, an increase of 47% over the same period last year. The increase was mainly due to the increase in content investment of iQIYI, Inc. and the content investment of Baidu, Inc. 's information flow network Baijia.

Judging from the data of the past five quarters, although the content cost accounts for more than 40% of Baidu, Inc. 's income cost, there is also a significant difference between the quarters, that is, the content cost input in the third and fourth quarters is higher than that in the first and second quarters. Therefore, the content cost input in the second half of the year may still be at a high level.

In addition, revenue costs include traffic acquisition costs, bandwidth costs, and other revenue costs. Traffic acquisition costs rose 41 per cent to 3.2 billion yuan in the first quarter of 2019 due to TAC costs and increased revenue from online televisions and offline digital screens. Driven by demand for video and cloud, bandwidth costs increased by 39 per cent to 2 billion yuan. And under the growth of depreciation expenses and first-party smart equipment sales, other revenue costs increased by 75% to 3.5 billion yuan compared with the same period last year.

With total revenue up 21 per cent year-on-year and income costs up nearly 50 per cent, Baidu, Inc. 's gross profit margin was rapidly compressed, falling nearly 10 percentage points to 38.49 per cent from 49.41 per cent for the whole of 2018, while Baidu, Inc. 's gross margin was as high as 52.63 per cent in the first quarter of 2018.

Emerging business is difficult to solve the urgent needs.

However, although Baidu, Inc. 's advertising business is facing difficulties, there are many bright spots in other businesses. In the first quarter of 2019, the installed base of DuerOS voice assistant reached 275 million, an increase of 279% over the same period last year, and the monthly voice query of DuerOS reached 2.37 billion in March, up 817% from the same period last year.

At the same time, Baidu, Inc. unveiled DuerOS smart devices, including a small smart display, a small TV bar, a small smart speaker, and a general remote control with DuerOS drive.

In addition, the self-driving test goes a step further. Baidu, Inc. began testing China's first self-driving taxis in Changsha in March 2019, and according to relevant data, the mileage of the Apollo is more than 10 times that of the second place.

It is worth mentioning that according to IDC's China Public Cloud report, Baidu, Inc. Cloud entered the top five of China's Iaas and Paas public cloud service providers for the first time. However, while the growth of cloud revenue is strong, it still requires constant investment.

Admittedly, Baidu, Inc. takes the lead in voice assistant and autopilot by virtue of AI technology, and the cloud business is also catching up, but in the short term, as most of the revenue comes from advertising business, it is greatly affected by the business environment, and when the mobile end needs to pay high costs to achieve traffic growth, distant water cannot save the near fire, Baidu, Inc. will still bear the pain.

For the second quarter of the business situation, Baidu, Inc. is not optimistic. In the guidance for the second quarter, its estimated revenue is between Rmb251-26.6 billion, and excluding the spun-off business, it will grow by only 1% to 6% compared with the same period last year. If costs remain high, how can Baidu, Inc. turn losses into profits?