Baidu Shares Slump As Outlook Disappoints

NEW YORK (AP) — Shares of Baidu Inc. took a hit Tuesday after China's top search engine warned its revenue may decline temporarily as it switches to a new advertising system.

Late Monday, the Beijing company posted a 42 percent jump in third-quarter profit, beating analysts' expectations, but said it expects a "temporary negative impact" on fourth-quarter revenue as it completes the transition to its new online advertising system, called Phoenix Nest.

Baidu's American Depositary shares fell $53.83, or 12 percent, to $379.14 in morning trading as investors digested the news. The stock has traded in the 52-week range of $100.50 and $439.90.

Analysts saw the guidance as a temporary blip in Baidu's path to making more money through advertising.

"We believe the transition will result in short-term pain but long-term gain in terms of monetization as (Phoenix Nest) increases the matching of more relevant paid links resulting in higher click-through rates," wrote Paul Keung, an analyst with Oppenheimer & Co., in a note to investors. He kept a "Perform" rating on Baidu.

Susquehanna analyst C. Ming Zhao said while the company's decision to force its customers to migrate to the new ad system will sacrifice its growth in the next couple of quarters, the payoff will be "healthier and more sustainable growth in the future."

The analyst expects Baidu to resume its "solid growth trend" in the second quarter of 2010.