Baidu: Position Yourself Now For Windfall Profits In 2012
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
Baidu.com (NASDAQ: BIDU) is the Chinese search equivalent of Google (NASDAQ: GOOG) and the most visited website in its country. Its website consistently ranks in the Top 10 visited sites in the world and makes the majority of its money through the sale of performance based advertisements. Founded in 2000, the company now serves over 220,000 advertisers and targets small and medium sized businesses, which provide the website with the majority of its daily traffic. Could an investment in Baidu today produce the same level of return that Google investors saw over the past decade?
The Chinese internet market is the largest in the world with over 470 million Chinese users on the internet. People experience an entirely different world wide web in the country, however, as its government maintains a strict hold over what material and information can be accessed. These restrictions are what prompted Google to pull its operations out of the country which gave Baidu a golden opportunity to take the market, gaining an 83% market share over all Chinese internet search traffic.
The majority of searches are in Chinese, but the search engine encountered growing concerns over its failure to accurately translate English search terms properly. With Google out of the game in China, Microsoft (NASDAQ: MSFT) jumped on the opportunity presented to it to partner with Baidu and provide the company with the needed tools to manage its English searches. Microsoft is a longtime rival of Google and seems to be motivated by the opportunity to access the largest internet audience in the world— an audience that Google is unable to reach.
Microsoft will need to abide by Chinese law and must censor its search results, which mainly requires the omission of stories on human rights or anti-government rhetoric. The software giant has received negative feedback for its involvement with Baidu and a censored internet but Microsoft believes that its relationship will encourage better relations between Chinese and English speaking people because it will be able to present its Bing search engine to the country.
Google still believes that it can make a profit from China through the sale of advertising to Chinese companies to users outside of China. It refused to give an opinion on Microsoft’s new relationship with Baidu, but pointed to $1.7 billion in spending on web ads by Chinese companies last year. Google believes that it can still compete in the Chinese market with Microsoft and Baidu by drawing from the potential advertising it can sell to Chinese travel agencies and international corporations.
There is a strong correlation between Baidu’s success and Google’s departure from the country’s mainland. Google still maintains a presence in Hong Kong; which it claims that the Chinese government has made attempts to interfere; with but has been out of the mainland Chinese market since 2010. Baidu stock responded to Google’s departure, posting exponential gains over the next two years. From 2005 to 2010, the stock rose from $12 per share to just over $40 but from the start of 2010 to present day, Baidu shares have risen to nearly $130.
Financial reports have shown that the spike in Baidu’s trading value has not been a fluke as the company is showing tremendous gains each year that suggest a meteoric rise in the near future. In 2008, Baidu made a net profit of $153 million and the following year it saw $217 million which was a 42% gain. In 2010, it posted a net profit of $535 million which was an explosive 147% gain and an indicator that the company is building momentum and is liable to pop in 2012.
I would strongly recommend taking a position in this company as its new relationship with Microsoft combined with its current momentum is setting this stock up for huge gains in 2012. The company has made tremendous progress in the last seven years alone, posting over $500 million in profit only six years after a meager $300,000 profit in 2005. Most people have not heard of Baidu and I envision that it will be the next stock to come out of nowhere and provide windfall profits to everyone who positions themselves to ride the wave all the way to the stratosphere.
Motley Fool newsletter services recommend Baidu and Google. The Motley Fool owns shares of Google and Microsoft. Vatalyst has no positions in the stocks mentioned above. 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.
