Chinese Internet giant Baidu (BIDU, Financial) has dipped 19% so far this year as its performance hasn’t been impressive enough. However, Baidu is making some strategic moves that could possibly improve its financial performance going forward. But, are these moves productive enough to tackle its American counterpart Google (GOOG, Financial), and can they lead to better times ahead? Let’s find out.
Baidu's moves
Baidu has entered into new areas and is making significant improvements in mobile search. Also, the recent industry shift to smartphones and tablets gives Baidu an opportunity to grow. Baidu now looks well-placed to build its position at key gateways to the Internet, particularly in mobile.
Baidu has been consistent so far with its top-line growth. Also, the company has benefited in a big way by monetizing its mobile ecosystem. For instance, 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.
In addition, Baidu is investing strategically in key areas. Search remains on top priority with dominance in both PC and mobile search in China that should drive its growth going forward. The company is also investing in new areas that capitalize on its unique position as the search leader in China.
Additionally, Baidu is concentrating on various areas such as mobile and cloud, location-based services, consumer services such as gaming, music, online literature and social, and lastly, on international operations that should certainly increase its profitability in the second half of the year. Baidu is also investing in entities that are strong in their respective industries of online travel and online video.
Innovations
Besides, Baidu has been providing cross-channel end-to-end marketing solutions in brand building. Its investments in advanced technologies, such as deep learning and natural-language processing, are quite impressive and are expected to drive the business in the future. For example, the Baidu Translate app, an image recognition technology that enables both image recognition and translation, is based on artificial intelligence.
These investments are expected to yield higher click-through rates by improving paid search relevancy, which will definitely improve its monetization capabilities. Also, the rollout of the commercial knowledge graph, and the customized search results for different verticals should enhance the user experience. Baidu now covers six key verticals, online gaming, healthcare, education, financial services, ecommerce, and travel.
Baidu’s iQiyi and PPStream video streaming platforms outpaced its primary competitor, Youku, one of the most popular video service providers in China. Baidu got its hands on 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.
In addition, Baidu has launched a Plus V customer verification program, as a part of an effort to create a safer, higher-quality search experience for users that will certainly attract customers and increase its monetization. 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.
Apart from this, Baidu’s flagship mobile product, Baidu Maps, has also solidified its leading position.
Valuation and comparison with Google
Analysts have predicted CAGR of 21.5% for the next five yeas for Baidu. Baidu is currently trading at a trailing P/E of 33, which indicates striking growth in the future. On the other hand, 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. Hence, Baidu looks like 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.
