Baidu (BIDU  ) was down by 3% following the company's Q3 report which topped in terms of earnings and revenue, but the company issued much weaker than expected guidance causing the stock to drop. The stock continued moving lower in the following sessions to hit a new, 52-week low.

Inside the Numbers

In Q2, Baidu reported earnings per share of $2.39 which was up 15% from last year's Q2 and topped estimates of $2.07. Revenue also beat expectations at $4.85 billion which beat expectations of $4.6 billion. This was a 20% improvement from last year.

These results were quite strong especially as the stock is down by more than 50% over the last few months. However, the stock sold off as the company issued Q3 revenue forecast between $4.7 billion and $5.2 billion, while analysts were estimating $5.1 billion.

Another factor may have been the fresh outbreaks of the coronavirus in China which is already leading to some lockdowns in certain parts of the country. Further, there are concerns that the country may not be accurately reporting new cases and that the Chinese vaccine is not very effective in preventing infections. Of course, this follows the regulatory crackdowns which have impacted companies like Baidu with vast amounts of user data.

In terms of various units, Baidu's AI and cloud revenue increased by 71% albeit from a low base. Online marketing revenue increased 18% which accounts for the bulk of the company's revenue. Non-online marketing revenue increased by 80%. The company's video streaming service, iQIYI, posted revenue growth of 3% which was below expectations.

Stock Price Outlook

Baidu continues to confound investors. It's made the full transition from being a growth stock to a value stock. The company's stock price is essentially unchanged from 10 years ago although its revenues are nearly ten times more.

It's also lagged Google (GOOGL  ) and is now significantly cheaper with a price to sales ratio of 3.1. One difference between the two companies is that Google has been able to find growth beyond Search with Android, Chrome, Google Cloud, etc.

Baidu failed in new initiatives although there are signs that it's gaining traction with its efforts around autonomous driving, cloud computing, and AI. This makes the stock quite attractive as it has upside potential due to these potential growth drivers, while its core business remains profitable and growing at a double-digit rate.

Of course, the big unknown is the political risk. So, investors have to assess the stock based on their interpretation. However, it's worth acknowledging that the Chinese government spent a decade building up its own tech industry so it's unlikely to recklessly destroy it. Further, such opportunities at these types of valuations only come about with such risks.