Baidu: Creating a Mobile and Video Powerhouse

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

With the transition to mobile search around the world, it probably shouldn’t be too surprising that Baidu (NASDAQ: BIDU) has struggled over the last year. In fact, the dominant player in Chinese search faces a bigger issue as the Chinese move quicker towards mobile. The China Internet Network Information Center reported that the total online population rose to 591 million with wireless users surging to 464 million. The percentage of the population on the Internet only reached 44 percent, providing hints that the next 100 million users will come via smartphones.

In order to meet this onslaught into the wireless world, Baidu has been spending heavily to improve the mobile search experience as well as to add technologies for mobile travel reservations and purchase a mobile app store and mobile video platform. All of these moves could make the company into a mobile powerhouse in China, yet the stock market has been focused on the higher expenses, causing earnings expectations to wilt for 2013.

Mobile apps platform

Baidu recently announced a deal to purchase mobile apps platform 91 Wireless for $1.9 billion. The deal helped push the stock to recent highs while causing NetDragon to collapse in Hong Kong trading. The deal involved paying $1.09 billion to NetDragon for a 57% stake and $800 million to the remaining 43% holders.

According to reports, 91 Wireless only holds a 15.6% market share of the mobile apps business in China with Qihoo’s (NYSE: QIHU) Mobile Assistant controlling 27.4%. Combined, the two platforms only control 43% of the market, providing the ability for a leader to consolidate it in the next couple of years. The details suggest that NetDragon’s mobile revenue rose more than 200% in Q1 to reach $23.5 million. At a run rate of nearly $100 million, Baidu paid a significant price for the app platforms future growth.

Video deals

The company recently purchased PPStream for $370 million to become a leader in the online video market, one that is quickly turning towards mobile. It will merge this business with the existing video platform iQiyi. According to the company, the combined entity will become China’s largest online video platform by number of mobile users and video viewing time.

This entity will compete against Youku Tudou (NYSE: YOKU) for dominance in the online video sector. That company claims to be the leading Internet television company in China. For Q1, Youku had 100 million active monthly users on mobile with over 170 million daily video views. Total revenues were only $83 million, providing an example of how a corresponding division at Baidu would only equate to less than 10% of the $1.2 billion expected for Q2.

Valuation comparison

The purchase of a mobile app platform is curious considering the press by Qihoo to push into the online search market. As the leader in mobile apps, those two companies will go head-to-head in several key mobile markets.

Qihoo has seen its stock surge this last 12 months, going from $15 to nearly $60 now. It now trades at a lofty 35 times 2014 earnings estimates. With the market cap now reaching $7 billion, the stock trades at 12 times revenue estimates for this year.

Baidu only trades at 17 times forward earnings estimates after numbers have collapsed in 2013. With revenue still surging, the declines in earnings expectations have mainly come from decisions to push ahead with hiring more software developers for the push into mobile.

Youku is still struggling to be profitable, so Baidu definitely has the ability to squeeze it for margins. Having the cash hoard and cash flows sure will help Baidu compete in this sector.

Bottom line

The mobile Internet market is China has already become very competitive. Baidu is using its cash hoard of over $3 billion to quickly rise in the ranks of online video and mobile apps. Several developments that could help push more mobile searches back to the company. While investors missed the golden opportunity to purchase the stock back around $85 a few months back, the current stock price still offers plenty of room for multi-year gains as the China Internet market still has the potential of adding another 500 million users.

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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends Baidu. The Motley Fool owns shares of Baidu. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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