Chinese Internet giant Baidu (NASDAQ:BIDU)'s performance this year has been pretty bad as shares are down 9%. However, Baidu is making some moves in order to further improve its financial performance going forward. But, is Baidu a better buy than its American counterpart Google (NASDAQ:GOOG), and can its moves lead to better times ahead? Let's find out.
Exploring New Areas
Baidu is entering into new areas and has made significant progress in mobile. The industry shift to smartphones and tablets provided Baidu with a remarkable opportunity to capitalize on and build its position at key gateways to the Internet, particularly in mobile that positioned it for growth in the future.
Baidu has delivered solid top-line growth so far. Its mobile ecosystem has been growing and the company is also monetizing it. For example, by the end of last year, there were 14 Baidu apps with over 100 million activated users and as of the fourth quarter, mobile accounted for over 20% of its total revenue.
At the same time, Baidu is investing heavily in key strategic areas. Search remains its core business and its dominance in both PC and mobile search in China is a key growth driver. It is also investing in new areas that capitalize on its unique position as the search leader in China.
In addition to search, Baidu is now strategically focused on the following four areas: First, mobile and cloud; second, location-based services; third, consumer services such as gaming, music, online literature and social; and last, international operations. Baidu is also investing in entities that are strong in their respective industries of online travel and online video.
Product Development Moves
On the customer side, Baidu is positioned to provide cross-channel end-to-end marketing solutions in brand building. Its investments in advanced technologies, such as deep learning and natural-language processing, are also expected to drive the business. For example, the Baidu Translate app, an image recognition technology that enables both image recognition and translation, is based on artificial intelligence.
These technology investments should help Baidu generate higher click-through rates by improving paid search relevancy, which in turn improves its monetization capability. The rollout of the commercial knowledge graph, the customized search results for different verticals, should continue to enhance the user experience and create superior commercial value for its customers. Baidu now covers six key verticals: online gaming, healthcare, education, financial services e-commerce and travel.
As stated by iResearch, Baidu's iQiyi and PPStream video streaming platforms surpassed its primary competitor, Youku, as China's most popular video service. Baidu acquired PPStream in June 2013 for $370 million and has been combining it with iQiyi, bought in 2012, to boost its online streaming business. The money was well spent as iResearch claimed that Baidu attracted over 94 million monthly active users in January as compared to Youku's 83.5 million.
Baidu's timing was impeccable as China's video streaming market is expected to explode in the coming years. As of now, 450 million people watch online videos in China and this number is expected to hit the 700 million mark in 2016. According to iResearch, China's market for online video will be worth $2.86 billion in 2014, and then will double by 2017. Video streaming accounts for over 22% of the total revenue generated by online advertising, thus Baidu's rise to the top will prove to be a tailwind.
The introduction of the Plus V customer verification program as a part of an effort to create a safer, higher-quality search experience for users is another point worth noting. The focus over the coming quarters will be on deepening integration at the back end, in areas like app search, cloud storage and payment SDK app platforms.
Baidu's flagship mobile product, Baidu Maps, has also solidified its leading position and grew as an LBS platform. The addition of Nuomi to its ecosystem brings huge strategic value to its overall e-commerce offering.
Valuation and Comparing with Google
Baidu trades at a trailing P/E of 33. Moreover, its earnings growth projection for the next five years is also impressive at 21.5%. In comparison, Google's earnings growth projection for the next five years is less at 17%, even though it trades at a slightly cheaper 31 times trailing earnings. So, in my view, Baidu seems to be a better growth proposition for the future since it is slightly expensive but has a far better growth projection.
Also, Baidu enjoys better margins than Google. Baidu's profit margin is almost 33% and operating margin is 35%. In comparison, Google's profit margin is 21.6% and operating margin is 23.55%. So, from different angles, Baidu seems to be a better option than Google for the future.
Baidu's dominant position in China and its recent product development moves are key long-term growth drivers. It is not very expensive either when compared to Google, and it also enjoys better margins. Hence, Baidu looks like a solid investment for the long run.