New Developments Make Baidu Very Attractive
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The giant Chinese language internet search engine Baidu (NASDAQ: BIDU) faces huge growth potential in the still emerging economies of China. Although strong competition exists in the technology sector of China, Baidu seems positioned to grow as a company, and increase shareholder value. Since the middle of April, Baidu stock price has dropped about $30 per share, to around $120. I think this leaves room for growth in the stock price, as the price per share has topped $150 multiple times in the past year.
Baidu has recently entered into a partnership with two other large internet companies with the plan of purchasing online licensed video content. Tencent Holdings, Sohu.com (NASDAQ: SOHU) and Baidu will join together to share online video content, essentially lessening the burden of purchasing the expensive copyrighted content. Tudou Holdings (TUDO) and Youku (YOKU) currently have an agreement that allows for stronger pricing power of purchasing content, and accounts for over one third of China's internet video advertising revenue. Chief Executive Officer of Sohu video Deng Ye noted this new partnership will help push the Chinese sector of the industry into better competition.
This agreement should be profitable for Baidu, as it will gain more online video content at a much lower price. Increasing profitability is always a good sign for a company, and it should also lead to higher return on investments for the shareholders.
Baidu is not just expanding its business in its normal markets, but also into new markets including the production of its very own smartphone. The smartphone, which will cost around $160, will use an operating system known as the Yi mobile platform, that is compatible with Android applications. Users will be able to use cloud services, and the photo, music and map applications that are free via Baidu's servers.
Baidu's main competitor in search engines, Google (NASDAQ: GOOG), is highly censored by the Chinese government, which leads to a poor quality online searching experience in China. In theory, the Baidu search engine is preferred over Google's because of the higher quality search experience. All Android smartphones, which make up a large share of China's smartphone market, use Google search as the main search tool. One may deduce that users of Android phones in China may be unhappy due to the low quality of the Google search engine that is used.
Therefore Baidu believes mobile users will prefer the Baidu smart phone to any of the Android phones, and thus switch over to using the Baidu phone. As users switch to the Baidu phone, the company will take a portion of Google's market share and revenues. The new Baidu smartphone is one way the company plans to increase its popularity further over Google, and capitalize on the smartphone market. I believe it will increase the value of Baidu, and shareholders will see an increase in its value.
Baidu has also announced an agreement with Apple (NASDAQ: AAPL) in which Baidu's search engine will be included on the iPhone in China. This will prove profitable for both companies, as Apple's iPhone should become more popular and convenient to use with the addition of Baidu's search engine; which currently accounts for about 80 percent of China's search queries. This will be good for Baidu as well, as it gives the Chinese smartphone market another product where users can use the top Chinese search engine over the less popular Google.
Baidu has focused much of its entrance into the smartphone market on finding a way that will promote its internet search engine on products separate from any Android products. It hopes to promote the products that include its search engine while at the same time lowering the market share of Google's Android phones. However, Baidu is also taking some shots directly at the Android operated phones.
Baidu launched its custom Cloud ROM that allows Android users to swap the main Android applications for Baidu applications. Some of the included in the Baidu applications are the MP3, news, and GPS capabilities, along with voice recognition, cloud storage, and battery conservation mode. The Cloud ROM will allow Android users to achieve a more personalized experience, increase Baidu's user base, and enhance the reputation of Baidu as a leader in the cloud-computing segment of technology.
Android users in China previously suffered from not only the slower Google search engine, but from the inability to use Baidu applications that were more relevant to the Chinese population. Cloud ROM tackles this issue so users can keep the Android operating system if they prefer it, but can still convert many of the applications to the Baidu version.
I expect these moves regarding the smartphone market to be very profitable for the company. With the smartphone market in China increasing dramatically, comes the increased use of the internet and the demand for a good search engine. Baidu offers this but its search engine was not a major player in the mobile internet market until now. Users will get to choose between products that promote the Baidu search engine and those that primarily use Google. Baidu will be rewarded for entering the smartphone market with a higher stock price and greater value for shareholders.
With its recent drop in stock price per share, I believe we have a good opportunity to invest in Baidu stock. Not only is there obvious room for growth in stock price up to the $150 range, but Baidu is also positioning itself to take advantage of the increased use of the mobile internet. Not only is it working to become a viable option within the iPhone and Android-operated smartphones, but it is also creating its very own smartphone. I expect these events to increase the value of the company, and generate higher return on investment.
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