Baidu: Still Growing, Still a Great Buy
Lyons is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Yesterday, in a decidedly broad look at the current (and future) Internet landscape, I took a moment to recognize Chinese web giant Baidu, Inc. (NASDAQ: BIDU) as a company to keep an eye on. Since then, I’ve delved a little bit deeper into the Baidu story; suffice it to say, my verdict has changed. Baidu is a company that’s growing fast with plenty of room to go, and at $135 a share, it’s still a great time to buy. But don’t take my word for it—have a look at the facts:
Their revenues are up.
To those who’ve been paying attention, this shouldn’t come as a surprise. Their revenues, it turns out, are always up. To paint a picture in RMB, 2006-2010 looked like this: 838m, 1.7b, 3.2b, 4.4b, and 7.9b, respectively. That’s a CAGR of 75.3% over a five-year period. Of course, and as with other e-ventures, straight revenue growth doesn’t always lead to an increase in net profit; if operating expenss grow in lockstep with a website’s traffic, then shareholders might be stuck with a slow-cooker.
That's not the case with Baidu.
Their advertising revenue, which accounted, by their modest estimation, for 100% of their total revenues in 2010, is based primarily on a P4P, or pay-for-performance, model. Allow me to explain: advertisers, which increasingly run the gauntlet in terms of size and variety, place bids on certain keywords and phrases. The highest bidder gets a coveted spot in any search results that included that word/phrase in the query, and Baidu pockets the amount of the winning bid every time a user clicks on the bidder's site. In other words, more clicks equals more cash. And guess what?
There are a LOT more clicks coming down the pipeline.
As I’ve already pointed out, China is getting online at an astonishing rate. As in: more new users from 2007-2010 than total users in the U.S. of A. With population penetration at 34% (compared to 74% here at home), that 20% year-over-year growth rate might slow down, but it isn’t about to come screeching to a halt. The Chinese government, which is scrambling to usher the PRC into the Digital Era, will see to it that there are hundreds of millions of new users in the next three to five years. That means a lot more business for Baidu.
Now, will there be some increased expenses associated with that jump in traffic? Sure…with growth comes upkeep, and in this case that’ll come in the form of bandwidth/server acquisition, personnel increase, and R&D. But will those expenses bog Baidu down? If the past in any indicator, absolutely not. From 2008-2010, while total revenues grew by 154%, operating expenses as a percentage of toal revenues tumbled by over 15%, and net income rose a formidable 2.5b. If you’ll indulge me a catch-phrase moment: that’s a lotta yuan.
But what about the competition?
To be brutally honest: they hardly exist. Baidu.com is, according to independent studies, the largest website in China, claiming a staggering 76% revenue share of the country’s Internet search market. With Google (NASDAQ: GOOG) gone underground and their brand at all-time high, Baidu is, in no uncertain terms, a cornerstone in the emergence of a digital China. They provide services for finding media, businesses, people, merchandise, news, knowledge, and everything else you could want from the Internet—including a special site catered to senior citizens making their first tender steps into cyberspace. Finally bought Granny a laptop? Put her at ease with the Baidu Senior Citizen Search!
Couple this stunning dominance with the fact that it all occurs in a character-and-pinyin-friendly context, and you’ve got a company with a massive head-start on whoever is gunning for their territory. Sound too good to be true? Maybe it is. Maybe, as I write this, two starving students in a Wudaokou flat are plotting a new way for their countrymen to experience the web, a revolution that will kick Baidu* out to the has-been curb. Stranger things have happened. For the time being, though, people are still enamored of search bars, China is still lurching toward modernity, and Baidu is still a very good buy.
*And Google: in case you hadn’t noticed, the two operate under essentially identical business models…except for the whole, ya know, “willingness to work with the Chinese government” thing.
Lyons Geoge does not hold a position in any of the above-mentioned companies.