Baidu: A Good Near And Long Term Buy
Ashish 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) has long been called the Google (NASDAQ: GOOG) of China. It has greatly benefited from Google’s retreat from the country following Chinese government censorship issues, and it now holds around 75% of the Chinese online search market share. With a market cap of around $38.32 billion it is well ahead of its main competitor Sohu (NASDAQ: SOHU), which has a market cap of $1.48 billion. As Baidu looks to capitalize on its leadership position in an under saturated Chinese market we rate this stock as a buy.
Key Positives for Baidu:
Cloud Computing and Mobile Apps: Baidu is the first to enter in the business of cloud computing in China and this gives it an advantage over its competitors. With Baidu’s continued focus on cloud computing services Baidu can deliver data, content and apps on mobile devices.
Baidu is also looking to provide an open platform to developers for creating apps through its cloud computing services. Till Q1 end, Baidu’s Platform had around 50,000 developers and 60,000 apps. We believe that web apps are going to replace the currently popular app format as they are being integrated into web applications based on cloud computing and HTML5.
Baidu also launched the Baidu Application engine (to create and develop apps at a low cost on an open Platform) and Mobile test bed (to test apps across multiple platforms) in Q1, which shows Baidu’s focus on building its own app library. As Baidu looks to capitalize on Cloud Computing services and mobile apps we expect it to perform better in the long term.
Phoenix Next for Mobile: Baidu’s mobile traffic increased to 20% in 1Q2012 from 15% in 4Q2011. Baidu is preparing to launch a new “Phoenix Next” mobile monetization platform which will help Baidu to increase its CPM for mobile ads.
SMEs Likely to Perform Better in Q2: Baidu’s customers increased from 311,000 to 321,000 in 1Q12. While revenue per customer decreased 7.6% sequentially, it increased 49.9% Y/Y. The low revenue per customer may be attributed to macro uncertainties and the changes in leadership in China, due to which the advertisers were cautious in their spending across media platforms. We expect these revenues to increase with a large unspent marketing budget in 2Q12.
Source: Company Data, TheAnalystHub.com Research
Increasing Revenue From Search Queries: Baidu already had a stronghold on android devices as around 80% of the Android devices in China came preloaded with Baidu’s search engine. Now Baidu has also reached a deal with Apple (NASDAQ: AAPL) to use Baidu’s search engine as the default search engine on iPhones and iPads in the Chinese market. As the Chinese population continues to increase both in number and affluence, this deal could help Baidu to reach additional users and hence increase revenue from search queries.
To sum up, we like Baidu from both a short and long term perspective. In the near term, we expect a rebound in advertising spending in 2Q12 and Baidu’s partnership with Apple to bear fruit. In the longer term, cloud computing, mobile apps, and the Phoneix Next platform for mobile are expected to drive growth. As the Chinese market is still several years behind the US when it comes to its online advertising to GDP ratio, there is a secular tailwind for Baidu’s growth. We rate Baidu a buy.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Baidu, and Google. Motley Fool newsletter services recommend Apple, Baidu, Google, and Sohu.com. 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.