June 28, 2018 / 4:37 AM / 5 months ago

Breakingviews- Baidu's $1 bln buyback is too little or too much

Baidu CEO Robin Li delivers a speech at the China International Big Data Industry Expo in Guiyang, Guizhou province, China May 26, 2018. Picture taken May 26, 2018. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT.

HONG KONG (Reuters Breakingviews) - Baidu’s planned $1 billion share buyback appears neither generous nor wise. Stock markets have been looking a bit rough recently but the internet giant’s shares have still outperformed the S&P 500 since the start of the year, and it could have afforded more munificence. At the same time, the clunky search engine wants to reinvent itself as a leader in artificial intelligence and quantum computing, both of which are expensive endeavours. The $85 billion company has better things to do with its money.

This was no lavish handout. Baidu reported around $18 billion in cash and equivalents as of March 31, and has been performing well. First quarter earnings almost quadrupled year-on-year to hit 6.7 billion yuan ($1 billion), over twice what analysts polled on Eikon had forecast. Plus the $1 billion in repurchases authorised by the board is to be spent over 12 months, leaving executives room to hold back.

    Indeed, investors were uninspired by the giveaway, and Baidu shares fell over 3 percent on Wednesday. To be sure, there’s been a wider selloff in Chinese technology company shares as trade war fears rise. But that’s not a problem one can throw money at. The May resignation of Chief Operating Officer Lu Qi bothered the market more: punters knocked $9 billion off Baidu’s market value in reaction to that, fearing his departure would lead to Baidu losing its focus on AI to wander once again into silly sidelines it had been steadily getting away from.

    It would be better to stay away from handouts altogether. Instead, Baidu may want to focus on what investors want it to become, namely a market leader that uses its established expertise in coding to beat rivals who are also throwing money hand over fist at like AI, autonomous driving and the like. Winning against heavyweights like Alibaba and Tencent won’t be easy given the war for talent. A recent report by Chinese research firm Iyiou showed 90 percent of Chinese AI companies lost money in 2017, and more money will get burned on the way to profitability as smaller startups pour in too. Baidu spent around $500 million on research and development last quarter. Why not use the $1 billion to triple that? Investors don’t want Baidu’s spare change, they want Baidu to change.

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