835 Million Potential Customers
Danny is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This is one in a series of ongoing posts detailing why I invest in various companies. I focus primarily on non-financial intangibles that point toward the possibility of multi-bagger potential.
What they do: Baidu (NASDAQ: BIDU) has been referred to as the Google (NASDAQ: GOOG) of China. Baidu is not only the preeminent search engine in China, but they have also diversified into many areas of the web, all designed to increase their dominance in search.
In fact, Google was previously a competitor, but threw in the towel, rather than contend with excessive Chinese government regulations (and interference?) and concerns that they would be required to comply with Chinese law and supply user information to Big Brother of China. Google moved the backbone of their operations to Hong Kong, thereby giving Baidu a virtual geographical monopoly.
What about growth? - One of the main reasons I see to invest in Baidu is the same reason I see to invest in MercadoLibre - internet growth. As of 2011, estimates put Chinese internet penetration at just over 38% of the population (of the 1.347 billion population). Here in the US, internet penetration is more than double that at 78% (of the 313 million population). In terms of sheer numbers, they still have an untapped pool of users larger than the population of the United States. Granted, some of the population of China are in remote geographic locations and do not have the disposable income of their American counterparts and that the total internet penetration may not be comparable for some time to come.
Emerging Middle Class: Within the untapped population of internet users, the greatest growth will likely come from the emerging middle class. Forbes states: Within a generation, the middle class in China will be roughly four times the size of the American middle class population, according to the UN Population Division and Goldman Sachs. By 2030, China should have approximately 1.4 billion middle class consumers compared to 365 million in the U.S. and 414 million in Western Europe. (The remainder of this article bears reading).
Note that they said that within 18 years, the population of Chinese middle class consumers will be greater than the entire population as it stands today!
Search Drivers: There are also numerous areas peripheral to search that Baidu has infiltrated in order to extend their dominance in search. Last year, they acquired leading travel search engine Qunar. Earlier this year, they launched a cloud storage platform called WangPan. Baidu has taken a page from the Apple playbook and launched a searchable applications library that allows third-party applications to launch directly on Baidu, rather than another website. Developers get 70% of any applications purchased, while Baidu gets the remaining 30%. Then there are the rumors that Apple will be using Baidu as the default search engine in an upcoming iOS for phones released in China. Baidu has also announced that they own plan to release a mobile OS (called Yi) for smartphones, to compete in the infant category of mobile search on their home turf. Additionally, it is reported that Baidu plans to export their search technologies to new emerging markets, such as Brazil, SE Asia and North Africa. They believe that their expertise in lower-end internet users will transfer well. These initiatives are all designed to further cement Baidu’s top-dog status in China’s internet search, and begin their trek to world-wide exposure.
Box Computing: Many of the above mentioned incursions share one thing in common – they are part of Baidu’s comprehensive plan to continue to dominate and drive business to their core search. One of the things that will help propel Baidu’s growth going forward, may well be their Box Computing initiative. Former Fool Sean Sun explains:
What is box computing? It’s essentially being able to do anything just from a single search box. Say you type the name of a book, your first search result is an embedded Kindle app with the book. Say you type the name of a movie, your first search result is an embedded YouTube video. Say you type “Beijing Shanghai”, you get flight times and prices. Say you type a song title, your speakers start playing and you get an option to buy the song through Baidu’s homegrown payment processing system.
The down side? The biggest wild-card in any investment in China is the Chinese government itself. Long-time investors in Baidu will recall that there have been several instances where actions or even comments by the Chinese government have caused Baidu’s stock to swoon. Last year, Baidu was instructed to police fake pharmaceutical companies and travel agents that purchased ads on Baidu’s website. Most recently Baidu, along with other Chinese web portals were warned by the Chinese government to take action to control to spread of perceived rumors on their sites. Up until now, Baidu has received most-favored-son status by the government, but that could change.
Baidu’s execution to date has been nothing short of remarkable. The emerging middle class, the as yet untapped population of internet users and the peripheral areas within Baidu’s arsenal will provide plenty of opportunities to grow going forward. They will likely continue to beat estimates and reward shareholders for some time to come. While the specter of the Chinese government will be a shadow over any investment in China, Baidu offers the most stable and consistent opportunity to tap into the emerging middle class and untapped market of internet users to come. I believe that there will likely be short-term hiccups from time to time (as Baidu investors have seen in the past), but the trajectory of growth the Baidu has seen and will likely continue to see greatly offsets any shadow from governmental interference or short-term difficulties.
dvena owns shares of Baidu, Google, and MercadoLibre. The Motley Fool owns shares of Baidu and Google. Motley Fool newsletter services recommend Baidu and Google. 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.