Beijing-based company Baidu (BIDU) Inc. is a Chinese-language Internet search provider, which offers a search platform principally through Baidu Online Network Technology Co. Ltd., as well as online advertising to approximately 600,000 advertisers. The company offers Japanese search services as well, and online marketing services to its customers directly and through other distribution networks. Since Badiu.com ranked as the most popular website in China, the firm derives most of its revenue from online advertising.
This company’s recent performance has given some surprise, as it surpassed the estimated figures for both revenue and net income. Baidu’s online marketing customer base grew 11.3%, resulting on a search revenue growth of 51% year over year. The company has recently invested an important sum in mobile services such as mobile search, app distribution and location-based services, investment which took an important bite on profitability. Nevertheless, foreign exchange gains and lower effective tax rate helped raise net income to USD2.8 billion.
Baidu expects to keep up with its improvement plan, investing in marketing, traffic acquisition, user structure and content, despite the high costs this implies and the pressure it is likely to cause over profit margin. However, in order to strengthen its search business, the company requires these investments, and improving its product developing new business areas such as cloud service, mobile app distribution, mobile maps and online travel booking has proven to be necessary.
The Most Popular Search Engine
Since 2000, Baidu Inc. has been providing services as Internet search engine in China, and has come to achieve a dominant position among this market; approximately 86% of total active search engine users in China had chosen Baidu as their favorite, as of 2013.
This company also provides services through other products which have certainly enhanced the user experience. One of the most popular is Baidu Tieba, a service with over 200 million active users which functions as a query-based searchable community providing users a platform to exchange their views and share knowledge and experience on different subjects. Another Baidu product is Baidu Knows, a collaborative web-based community in which users can answer and pose specific questions. Other products are Music and Video streaming, Encyclopedia and Baidu Map. Through its product portfolio expansion, the company has increased user base and established its position as the most popular search engine in China.
Revenue is generated mainly through keyword search marketing services, displaying links to advertising customers’ sites, triggered by keyword searches. Advertisers, mostly small or medium-sized businesses, bid for priority of display position for their links in the search result.
Although the company has been developing mobile services in order to respond to the customers’ shifting behavior, competition is increasing in the mobile search market. Nevertheless, online marketing customers increased year over year, 33% between 2005 and 2012. The company has dedicated quite some effort to enhance user experience to drive traffic to its site, resulting on an increase in revenue per customer, which has grown 30% each year since 2005, along with its search traffic market share.
The size of its network is difficult to imitate by peers, which positions Baidu as a dominant online platform among the Chinese market. However, key competitors have been building their user bases through new mobile products. Tencent Holdings Ltd. (TCEHY) has recently teamed up with Sogou, mostly owned by Sohu.com Inc. (SOHU), partnership which might represent a threat to Baidu in the near term. Moreover China’s leading anti-virus software Qihoo 360 Technology Co. Ltd. (QIHU) has developed a smartphone browser and seized 10% market share. Yet analysts think Baidu’s mobile search engine will eventually reach the PC search business levels, and stand above competitors. By improved awareness of online marketing by SMEs, and an accelerated penetration in the mobile device market will serve as tailwinds to the company’s growth in the next years.
It is known that the Internet penetration rate in China is behind developed world, with only 42% as of 2012. However, the new government has announced an investment plan of $323 billion by 2020 to expand fixed-line and wireless broadband connectivity, all of which will strongly increase mobile Internet users. In order to keep up with these changes, innovation is required, and thus investment from the company which might weigh on the overall profit margin in the future. Moreover, mobile search’s low monetization will mean a slow recovery of profit margins as it will take some time before the company can collect the results of their investment efforts.
Nevertheless, bulls state Baidu, Inc. is the leading search engine in China, with 130 million active mobile users in the market, and has a privileged position to establish dominance in the mobile search market as well. Furthermore, its advertiser base has a still plenty of growth potential, serving only 1.5% of China’s SMEs. Baidu is also capable of acquiring companies and products as well as merging, being able to consolidate its domestic market position and expand overseas. Yet this stock seems to be ranked as a strong sell due to its high price and moderated growth projections.
Disclosure: Damian Illia holds no position in any stocks mentioned.