Not Baidu-ing Their Time
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
China’s search engine giant Baidu (NASDAQ: BIDU) reported lowered guidance even though profit and revenue were up ~75% year over year. This act of expectation management was rewarded with a good ol’ fashioned thrashing. Since its peak just before earnings, the stock has shed just over 14%. The failure to capture and hold $160 per share has the stock trapped in a long-term trading range between $110 and $160.
Baidu’s hold over the Chinese search market, its core business, was bolstered last year by the ouster of Google (NASDAQ: GOOG) from the market in its fight with the Chinese government over censorship issues. Since that time Google’s share of the search market has dropped from around 30% to 16-17%. A lot of Baidu’s growth in revenue and income has come from this and by now can no longer be expected to be a growth driver. Lowered guidance on growth then makes sense. Is that all though? With a market like China’s, competition at the edges is inevitable.
Fighting with Each Other’s Weapons
Google withdrew from the search space, but not from China. The strength of their business lies in their back-end technology, DoubleClick Ad Exchange. Services like that are seeing the bulk of the money flow from advertisers and away from traditional banner ad space on portal sites like Yahoo! So, Google opening DoubleClick for Chinese advertisers is a big deal, but not in the short term. Display ad revenue is growing but it is still small. It has not been a core strength of Baidu’s, paid text ads are as that has been the province of Sohu (NASDAQ: SOHU) and their Sogou search engine.
To get a piece of that action, Baidu, Sohu and the biggest video content provider in China, Tencent, formed an alliance to distribute video and licensed content. Baidu and Sohu working together then looks like a preview of the future with Sohu having the market and technology to combat Google and DoubleClick, if the latter is successful in pulling in the ad Yuan.
Baidu’s success will depend on their ability to build a full service platform to bring people in, al a Facebook. So far the results have been uninspiring, sounding an awful like Yahoo! to me. This is the same problem Google faces and why Google+ may never succeed the way Google wants it to.
Baidu Yi is a start. A version of Google’s Android OS for the mobile market launched at the end of 2011, Baidu Yi is in its infancy and will try to act as the launching pad for their e-commerce and advertising business. To help with adoption, they are developing an entry-level unit for 1000RMB or $159 to compliment the Dell Streak D43 which carries a more iPhone-like price tag of 2,999RMB ($475) but which has not commanded iPhone 4S like sales.
For Baidu, though, if the smartphone business turns out like their Twitter-killer, which was scrapped last fall, then being the search engine of choice on the devices owned by the most brand loyal customers, those of Apple, may be the next best thing. That reality may come to fruition soon, as the two companies are in talks over Baidu being the default search engine for the iPhone in China, replacing Google.
Big Enough for Everyone
The market in China is so big and growing so quickly that there will be an opportunity for a number of players in the market to be great investments based on their carving out niches within the landscape. Sohu’s most recent earnings were mixed as revenue and profit numbers were up year over year but operating expenses rose sharply, and like Baidu, guided lower for the year. That said, though, Baidu is only expecting to grow by 60% this year, as opposed to the 70+ % analysts and investors have gotten used to. As Chinese consumers begin to flex their spending muscles they are looking at overseas brands to buy. For this reason Baidu has set up a division based out of Singapore and is looking to Australia as their next point of expansion after Hong Kong, London, Taiwan and San Francisco.
Baidu looks to be at a cross-roads, similar to where Yahoo! was a few years ago. Yahoo! failed to re-invent their core business coasting on the old internet interface and Facebook has destroyed it. Yahoo! now has to get serious about re-inventing itself. Baidu has a moat in the form of the Chinese government surrounding its business right now by keeping both Facebook and Google at bay. Paid search is going to yield to the biddable display ad market. If they are unable to make a number of these moves pay off, they could face similar erosion in the coming years once that moat is breached.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.