Alliances in China’s Search Engine Wars Being Made

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

Baidu (NASDAQ: BIDU), the largest Chinese search engine, is reportedly working on developing a new image search feature which will be able to recognize facial appearance, similar to what Google’s (NASDAQ: GOOG) “Find My Face” does on Google+.  Baidu’s users will be able to upload an image of any popular person or celebrity and the search engine will find other images from the Internet of that person. In essence, users can search through images or URLs instead of the traditional textual input.  While this is a great feature for Baidu to have developed in case China’s Government and Google ever kiss and make up, Baidu is feeling the heat of competition from behind the Great Firewall.

Baidu has virtually exploded in the last couple of years, following the challenges Google faced in China that eventually led to its departure in 2011, with revenues increasing from a humble $513 million in 2008 to $2.33 billion by the end of 2011 (its revenues in the previous quarter were close to $1 billion). Its shareholders, who were getting a reasonable EPS of $4.85 in December 2008, were seeing $30.48 per share in 2011 (a stock split of 10:1 occurred in May 2010). The Chinese Government had effectively created a monopoly but, unfortunately for Baidu and its investors, the market hates monopolies and will tear them down inch by inch. Last year, an antivirus developer based in China called Qihoo 360 Technology (NYSE: QIHU) launched its own search engine for the Chinese market. The business has garnered nearly 10% of China’s search engine market.

 

Baidu

 

Qihoo

360 

 

Nov-12

Dec-12

Nov-12

Dec-12

Page views

72.03%

71.76%

9.90%

10.39%

Unique visits

72.84%

71.47%

10.02%

10.52%

Source: CNZZ

In terms of search features, Qihoo is still far behind Baidu. The company has only just launched the conventional image search facility. However, that might change in the future; according to ZDNet, the smaller player in China’s search engine market is now looking to partner with Google. A partnership between the two is expected in the future as talks are currently underway. No details have been officially released at the moment but something is expected in the current year.

It looks like Google will, ultimately, have an important role to play in China, even if it has to use Qihoo as its proxy, which may be bad news for Baidu. Chinese advertisers traditionally have had very few options except to work with Baidu on Baidu’s terms. And this is likely where Quhoo has been able to build market share. The increased competition coupled with the slowdown in the domestic economy have already begun taking their toll on Baidu’s stock. In the past six months, the company’s ADR has slipped by 12% as opposed to Qihoo’s shares, which have gone up by an amazing 91%.

 

Baidu

Qihoo

Market Cap

$35.47B

$3.78B

Stock 6m

-11.93%

+90.96%

P/E

22.96

4.75

EPS

4.42

6.77

Yield

N/A

N/A

ROA

24.51%

7.15%

ROE

50.39%

12.14%

 

This dalliance between Qihoo and Google is likely behind the rumor that Baidu is now looking to acquire either Sina Corp (NASDAQ: SINA) or its prized social media micro blogging platform Weibo.com. According to Credit Suisse’s research note, Baidu raised nearly $1.5 billion in debt about two months ago for this purpose.  While Baidu is rightly called China’s Google, Sina is the country’s reply to Twitter, although, as I have mentioned in my previous article, Weibo is much bigger and far superior to Twitter. The two, Baidu and Sina, already have an agreement to share content on mobile searches.   Baidu attempting to acquire Weibo is an acknowledgment that their attempts to push into that arena have failed, similarly to how Yahoo! was never able to capitalize on uniting its users into a coherent community.

In its previous earnings release for the third quarter of 2012, Baidu reported an almost 50% increase in quarterly revenues year-over-year to $994.6 million, while its net income increased by ~60% to $478.6 million. Almost all of the revenues, $993.8 million, are attributed to “Online marketing revenues,” which are up by 49.6% from the year-ago quarter. This trend is going to continue in the coming quarters, but the growth is going to slow down. For the fourth quarter, the company is expecting a 37.6% to 41.8% increase in revenues from last year to about $994 million.

As always, Baidu will continue to explore other revenue streams, with or without Sina’s acquisition. One of the things that makes Baidu such an interesting company is, despite the huge put placed under their business by the Chinese Government, it has been aggressive in finding new revenue sources beyond traditional ad space.  Baidu got that memo well before Yahoo! did even if its efforts have been mixed at best.  Despite Qihoo’s advances, Baidu still dominates the Chinese market, and that is not likely to change anytime soon. Unlike Google, it is still primarily just a search engine, but it is now aiming to expand and has great prospects for the future, as its mobile ad revenue is showing solid growth if lower margins, something that Google is experiencing as well.

Baidu and Sina are among the leading Internet Chinese firms and have a combined weight of 15.87% in the Guggenheim China Technology ETF  for those interested in this sector.  Compared to them, however, I prefer Tencent for its impressive portfolio of games and regional game distributors. Sina and Baidu together may prove to be a synergistic amalgam as, unlike Twitter, Weibo has sustainable revenue.  Together the two could become the premier information platform for advertisers. 


PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google, and SINA . The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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