Baidu's Journey from Desk Top to Mobile Advertising
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently Goldman Sachs has kept a neutral rating on Baidu (NASDAQ: BIDU) but lowered the price target to $135. There are a couple reasons for this, there is a transition from desk top to mobile by users. The stock’s recent contraction and slow earnings have correlated directly with growing mobile usage and cloud investments. The company must morph its “desktop search” into the mobile market to keep up. Mobile has already taken over 20% of the total volume of queries and with the company’s growth, it should surpass Goggle (NASDAQ: GOOG) by 2015.
Its core desk top business will continue to decelerate as Baidu transitions. Some analysts are lowering EPS for the next couple years by (3% to 8%) because they believe revenue growth will slow in this great transition period. Margins will be tighter and advertisement will continue to weaken. It is all due to this move to mobile by consumers.
Destined to Rule China’s Mobile Internet Mkt?
Baidu is exploring the possibility of acquiring an equity stake in UCWeb, one of the most popular Chinese mobile web browsers. A number of different scenarios are being floated around right now. One rumor has UCWeb going public soon and another one has Baidu going after the whole company. One rumor has it working on a joint venture with the company. UCWeb has more than 200 million active users in and outside of China and drives a huge amount of traffic in China which could command a hefty $1 billion price tag to any interested buyer. If these two companies could come together, Baidu may have a hand up on dominating the fast growing mobile market like it needs to do. It needs UCWeb to make the transition it wants to make. Revenue sources from mobile advertising will add significant volume to its base.
The inquiry by Baidu did not come easy. UCWeb's CEO Yu Yongfu stated very clearly that the company was not considering any buyout offers. But things change when the anemic economy appeared in China and started to knock at UCWeb’s door. With a slight change of heart, the $1 billion being offered by Baidu looks fairly inviting now. Its hard to turn that type of money down. A merger of this type would benefit both companies. Baidu would accelerate its transition to mobile markets with the new ability to drive traffic to its mobile search site and its application store. 28.9% of visits to its mobile search website came via UCWeb anyway, so tying in together makes sense.
Apple Alliance
Baidu has formed an alliance with Apple (NASDAQ: AAPL) which will allow Apple to make money through revenue sharing. It will take a piece of advertising dollars from search engine usage via its iPhone. It is a smart move by Apple to make Baidu its search engine and it will boost Baidu’s wireless advertising business. Joshua Maa, chief executive officer at Madhouse inc., an advertising company in Shanghai that specializes in marketing on mobile devices recognized the alliance as a benefit to the company’s transition.
“This is definitely going to help Baidu.”
Because of this transition period, I do not see a lot of movement in the stock this year but because of the steps it is taking to adapt to the changing technology, I see great potential in the future. The alliance with Apple and the possible acquisition of UCWeb are smart moves by the company. Baidu is worth one's time to investigate for a long term investment. Prices may be at a bargain right now.
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