Where Does Baidu Go From Here? SWOT Analysis

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After releasing an earnings report that beat analysts’ expectations on the bottom line, but fell short up top, Baidu (NASDAQ: BIDU) shares dropped significantly last week. Analysts now give the company mixed reviews. Citigroup moved their rating from buy down to sell and slashed their price target a whopping 35%. On the other side, Piper Jaffray cut their price target just $7 down to $193, and kept its “overweight” rating on the stock.

So who’s right? A simple SWOT analysis might help us uncover a thing or two about where the company is headed. I don’t do SWOT analyses though (explanation found here), but here are some strengths, weaknesses, threats, and opportunities for Baidu.

Strengths

  • Brand Recognition – Baidu.com currently accounts for nearly 80% of search traffic in China. Its strong marketing and great product make it the go to source for information on the internet. Its next closest competitor is Google (NASDAQ: GOOG) with just 15% of the market after exiting China two years ago.
  • Research & Development – The company is dedicated to providing the best products in underserved markets, and is not averse to spending money to develop those products. Last quarter the company increased R&D spending 60% from the same period a year ago.
  • Leadership – Co-founder and CEO Robin Li is a knowledgeable, charismatic, and inspirational leader that has the ability to execute the company’s growth plan. The company also hires execs from other successful companies such as COO Peng Ye from Apple.

Weaknesses

  • International growth – Baidu has had trouble in its efforts to expand into Japan. Users view Baidu’s search results less favorably to its competition. This may be due to different search preferences in Japan compared to China. Baidu is still working to capture significant market share abroad.
  • Mobile – Mobile internet users account for nearly three-quarters of China’s internet population. This is a market Baidu faces challenges in monetizing. Much like Google, Baidu’s CPC on mobile advertising is significantly less than on desktop ads.

Threats

  • The usual suspects – Google is the second most used source for Chinese search with 15% of the market. Now based in Hong Kong, providing uncensored search results to those that can access them, Google remains a force to be reckoned with. In addition to Google, Microsoft (NASDAQ: MSFT) has come to play and is slowly capturing market share. The company stated its goal is 5% market share. A very modest number if you ask me.
  • New kids on the block Qihoo 360 Technologies (NYSE: QIHU) a local security and antivirus company launched its own search engine nearly three months ago. Growth has come quickly for the company, as they saw 7 – 10% of all search volume in August and plan to capture 15 – 20% of the market in the future.
  • Government – The Chinese government is notorious for its internet censorship (among other things). An increase in censorship laws may cripple search engine traffic and cause Baidu to rework search algorithms to provide the best results to users.

Opportunities

  • Mobile – Yes, one of Baidu’s greatest weaknesses is also its greatest opportunity. In its most recent conference call, Baidu execs announced a renewed focus on mobile and cloud computing. The company recently released a mobile web browser, and is working with phone manufacturers to have the browser pre-installed on 80% of handsets sold in China. The company also announced work on a $1.6 billion cloud computing center.  
  • Domestic growth – With an internet penetration rate of just 39.9%, China has a lot of room to develop its internet infrastructure to more rural areas of the country. As the internet reaches more people, Baidu will see increased revenue on volume if they can maintain market share.
  • PC security – Baidu recently entered the antivirus software market in Thailand, where they found a great opportunity. Success in Thailand, may translate into greater success in China, where competition is stronger, but the company will have a proven product to promote to its huge number of search engine users.

So where does Baidu go from here? As the leading search provider in an expanding market, I’m bullish on the company’s prospects. Certainly, the company has its struggles monetizing mobile, but that’s not a problem unique to Baidu. With its strong research and development team, I’m confident Baidu will come up with a solution to better capitalize on the mobile growth in China while maintaining its excellent market share in desktop search. 

Dig Deeper

Regardless of your short-term view on the Chinese economy, there may be opportunity in Baidu (aka the "Chinese Google"). The Fool’s brand new premium report breaks down the dominant Chinese search provider's strengths and weaknesses. Just click here to access it now.


adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu, Google, and Microsoft. Motley Fool newsletter services recommend Baidu, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus