New Reasons Investors are Buying Baidu Now
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you are an adventurous investor, and a student of world culture, you might consider investing in Baidu (NASDAQ: BIDU). Baidu certainly does not have the western household recognition of a Google (NASDAQ: GOOG), but it is the largest search engine in China, with a 60% share of the desktop search engine market in that country.
In late April, Baidu Chairman and CEO, Robin Li, announced the company's financial results for the first quarter of calendar year 2012, and they were impressive. Operating in the "new" Chinese business environment which no longer looks down on making money, Baidu reported a net profit of $299 million on $2.59 billion in annual revenue, and its quarterly revenue of $677.1 million was right in line with the market estimates of $677.51 million. It beat the per share earningsestimate of $.84 per share, coming in at $.87 per share, and its operating profit realized a 75% gain. While its projected revenue for the second quarter of calendar year 2012, at $847.2 million, is short of the estimated midpoint ($860.2 million) for the second quarter, it still shows about a 58% increase from the prior year despite the slow-down in the growth of the Chinese economy.
Baidu's Competition
Baidu's competitors in its market are few and far between compared to competition in the western market, and very far behind Baidu in terms of market share. Sohu reported $246 million in revenue for calendar year 2011, which is about 9% of Baidu's revenue. Sina (NASDAQ: SINA) is Baidu's biggest domestic internet competitor, and actually has the largest on-line Chinese community with over 280 million registered users, partly fueled by its very popular blog, Weibo.com. In calendar year 2011, Sina reported net revenues of $482.8 million, which comes in at about 19% of the total revenue for Baidu.
The only international search engine company to get a real foothold in China has been Google. However, if you access the google.cn (Google China), search page, you will be redirected to google.hk (Google Hong Kong). After several years of trying to comply with the Chinese censorship rules, as well as effectively operate under Western business laws, ethics and guidelines in an emerging Asian nation, the largest search engine in the world basically threw in the towel. Google now just maintains a legal presence in China (meaning it keeps its license to operate there). As a matter of fact, the most common rant I see about Baidu is that it is profitable and the largest because it does not operate on a level playing field. The protection it receives from the Chinese government, that basically hogties any foreign companies which may be in direct competition with Chinese companies, is blatantly unfair and illegal, which is all very true, by Western rules and standards.
This is where your knowledge of world culture may help. All the rant is true by Western rules and standards, but it is not true by Chinese rules and standards. For example, Baidu had more search traffic than Google, particularly in music and videos, because its laws are much more "flexible" when it comes to copyright infringement. Western law tends to frown on that kind of thing. While Google obeys the Western legal requirements, Baidu does not because it operates in China. But even in China, Google can't afford to ignore international laws because it does indeed operate on an international level. Baidu does not. So the playing field in China really is very uneven.
Should you invest in Baidu? Sure. Just be certain you know what to look for and what to watch.
For your investment dollar, Baidu is a company with little competition, in the largest emerging internet search market in the world. It already dominates the desktop search market in China. However, it does have more competition in the mobile device search market, with a much smaller share of about 35%. At 22% market share, Tencent Holdings is at least within range of Baidu. Baidu makes money, it pays a dividend, and it has no real competition in its niche; and it sits in a very big and growing niche.
Walking in Google's Shadow
While Baidu is not going head-to-head with Google at the moment, it certainly seems to be trying to walk in the search engine giant's footsteps. Google has Android. Rumors have been flying that Baidu is in talks with Foxconn, the manufacturer of iPhones and iPads in China, to produce its own smartphone, and has teamed up with Dell to promote its own operating system, Baidu Yi, a derivative of the Android operating system. It has also hedged its smartphone bet, undoubtedly to help increase its mobile search market percentage, by entering into an agreement with Apple to carry the Baidu search icon on its iPhones. It would not be surprising if Baidu's next step will be to offer its own cloud computing service to keep in lockstep with Google's cloud service, Google Drive.
Keep in mind that while Google made an exit (for the time being) in China, essentially leaving the playing field to Baidu, any search engine company trying to compete against Google would most likely take all the protection it could get before facing it on an international stage. Baidu is popular in a populous country, and it shows with the amount of revenue it generates. But Google generated $39 billion in revenue in calendar year 2011, which on a world stage, makes Baidu 7% the size of Google.
So, what to watch for on Baidu's own stage in China? Well, protection under a government's wing is a double edged sword. As long as the company is the favored one, it fairs well. But if that favor turns to another company, then Baidu may very well find itself in the same boat that Google was in. Business Week reported in its April 20, 2012 electronic edition that "The People's Daily", the newspaper darling of the Chinese government, will be listing its on-line business on the Shanghai Stock Exchange, and going for an IPO of $222 million. Keep in mind the workings of the Chinese culture, and an eye on this development carefully. Having bought Baidu stock, any moves by the government to promote "The People's Daily", or curb the growth of Baidu, will be a clear indication that it's time to sell.
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