Baidu Inc. (BIDU - Get Report) shares tumbled Wednesday despite the China-based online group posting stronger-than-expected second quarter earnings as investors reacted to a report that Google parent Alphabet Inc. (GOOGL - Get Report) is planning a new censored search engine in the world's second-largest economy.
The Intercept said the Google plan would block certain search terms linked to human rights, democracy and religion and could be launched within the next six months. The new search engine, code-named "Dragonfly", could allow Google to make deeper inroads into China, where its main platforms, including YouTube, are blocked by the country's Cyberspace Administration.
The report comes just as Baidu said net income for the three months ending in June rose 45% to 6.4 billion yuan ($940 million), well ahead of the consensus forecast of 4.82 billion yuan, as sale rose by nearly 25% to 26 billion yuan. Online ad sales were also up 25% to 21.1 billion yuan, the company said, and overall group revenues were seen hitting between 27.4 billion yuan and 28.8 billion yuan for the current quarter. Baidu also said it expects to increase its traffic acquisition costs, which will pressure margins in the near-term.
Chinese internet search giant #Baidu is 5% down in premarket on report that #Google is planning to launch a censored version of search engine in #China that will blacklist websites and search terms about human rights, democracy, religion, and peaceful protest. pic.twitter.com/r9CgSulilD— YUAN TALKS (@YuanTalks) August 1, 2018
"We think that we should see our margins dip several points from second quarter. We've been talking about this since the beginning of the year that we intend to increase our investments in traffic acquisition," CEO Robin Li told investors on a conference call late Tuesday. "In addition to that, we'll also continue to increase our investments in content acquisition so that our feed can continue to be able to acquire traffic and push long-term content. So, I think those are the main items that we could potentially increase our budget, sales and marketing and also cost of revenues in the content line item."
Baidu's U.S.-listed shares were marked 5.6% lower in early New York trading and changing hand at $233.30 each, a move that erase all of its year-to-date gains. Google shares were seen 1.16% higher at $1,241.50 each.
When asked if Baidu was seeing more regulatory scrutiny of its ad content, especially in the newsfeed that makes up a fifth of group revenues, Li stressed that the group holds "very high" standards.
"We do not want to give users something that's illegal or something that's under our borderline," Li said. "Again, we want to enrich our users' life and we want our users to learn something valuable."