Did Baidu Suddenly Solve the Mobile Problem?
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Only a month ago, Baidu (NASDAQ: BIDU) was struggling to stay above $90 as the company faced margin and competitive pressures from the shift toward mobile internet usage and more specifically, mobile search, that it doesn’t dominate like desktop search.
The leading Chinese search provider has increased operating expenses in order to expand research and development and marketing in order to build out the mobile products and to publicize the new products. Those expenses are far outweighing the growth in revenue, that reached nearly 39% in Q2 and is expected to top 40% in Q3.
Solving the perceived weakness in the mobile area is paramount to long-term success. Chinese Internet analytics company CNZZ lists Baidu’s search market share as dropping below 70% with 360 Search from Qihoo 360 Technology (NYSE: QIHU) reaching 15%. Market share has dropped from over 80% last year, making Baidu keen on improving products in both the PC and mobile spaces.
Unfortunately, the company doesn’t provide many metrics regarding mobile traffic, other than revenue exceeded 10% for the first time. Management hinted that total mobile searches were over 20% of traffic though no specifics were provided. In addition, cost-per-click, or CPC, remains lower on mobile, but the monetization rate is improving. One interesting note is that iPads actually monetize at higher rates than PCs. The statement wasn’t clear whether this included all tablets or really is tied directly to iPads only.
Some key metrics were the addition of a record 58,000 online active customers contributing to 38.6% revenue growth. Revenue reached $1.2 billion and is expected to move above $1.4 billion in the current quarter. The company placed some of the success in growing revenue, and specifically mobile, on the development of an integrated PC and mobile bidding platform that in combination has led to customers to develop more mobile friendly landing pages. The friendlier mobile websites drive up mobile monetization.
Due to building out the mobile products, SGA and research and development expenses combined increased nearly 80% over last year. This led the operating profit to only grow 3% over last year. Investors looking towards the long run should be happy to see the company aggressively pushing into mobile.
Baidu was specific to again claim a leadership position in mobile video after the purchase of PPS and combination with subsidiary iQiyi. Considering Baidu didn’t provide many details regarding mobile video, it is interesting to see how Youku Tudou (NYSE: YOKU) performed during Q2. The internet television provider reported that revenue grew 30% over last year. Margins appeared to improve and the company saw some impressive growth in the mobile section.
The company lists multi-screen video consumption as a game changer, yet the revenue growth rate doesn’t match that supposed reality. Mobile traffic did grow over 100% in the last six months. With total revenue only reaching $123 million, it clearly places that sector as a small portion of the search revenue business for Baidu. Considering Youku still lacks profits and is facing extreme competition from the better-funded Baidu, the real possibility exists that it will be squeezed out of this market.
The real news will be the Qihoo 360 Technology earnings report on Aug. 26. Investors have sent the stock up around 130% in only a few months on speculation that the company will make major inroads into Baidu’s search dominance in China, due in part to mobile.
Analysts forecast a doubling of revenue to $143 million with earnings, though, only rising roughly 50%. The stock trades at double the earnings multiple of Baidu, so investors will be keen to see the company continue to take market share in search.
Qihoo has numerous products including a PC browser, a personal start-up page, and a mobile security product that will help funnel users to the search engine. The company has around 457 million monthly active users on all of these products, providing a high penetration rate. In this sense, Qihoo reminds of Yahoo! in the domestic markets where it has a massive embedded user base, but one that still goes to Google for a majority of internet searches.
As long as the company continues to take market share, the stock can hold a market cap of nearly 15 times revenue expectations for the year. After all, Baidu just forecast quarterly revenue of nearly 10 times that of Qihoo. The biggest concern with this stock after the big run up is that Baidu is sparing no expense to ensure it maintains the dominance in search.
It appears too early to claim that Baidu has already solved the mobile issues that sent the stock down to below $90. The recent massive push into investing in mobile is paying off as revenue surged and mobile became a meaningful contributor to revenue. The potential for mobile in China still provides substantial opportunity for the company as the market size will eventually one day surpass the market in the U.S. that has led Google to a market cap of nearly $300 billion. In comparison, Baidu only has a market cap of $50 billion, leaving investors with dreams of long-term mobile profits.
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Mark Holder and Stone Fox Capital Advisors, LLC have no position 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!