"The best defense is a strong offense."
For the first time in a long-time things don't look too rosy for Baidu (BIDU). This is kind of hard to imagine considering the way things have gone for the Chinese search giant over the past few years. Thanks to Google (GOOG) throwing in the towel and a perfectly executed customer transition to the Phoenix Nest platform, Baidu shareholders have had little to do but sit back and watch money roll in.
Over the span of just two years management quadrupled revenues and nearly quintupled profits which in turn generated a 15 fold increase in the share price. Nothing could go wrong. Baidu was the perfect stock, a search monopoly in the middle of a growth boom in the world's fastest growing major economy.
But nothing lasts forever, especially on the internet, and over the past six months Baidu shareholders have started to discover just how quickly fortunes can turn. A stock which could do no wrong has now become a chronic underperformer. Upstart competition has emerged out of seemingly nowhere, and management which used to spend conference calls celebrating their performance is now talking about navigating transitions. Yep, Baidu is suddenly on the defensive, which is why now is the perfect time for them to make a bold acquisition.
Attack of the Mobile Disease
I have not written a dedicated piece on Baidu, but ever since its Q2 bounce I have been shorting the stock on and off on a mobile monetization infection thesis. Basically, take Facebook's (FB) much publicized headache and apply it to a more emerging economy like China where the mobile transition is likely to play out a lot faster. The trade has worked out pretty well. Baidu's recent earnings and guidance quickly provided confirmation of this thesis, and if someone still had any doubts, listening to management on the conference call was all that was needed to eliminate them.
Gems from the Q3 CC:
"I would like to remind everyone that this is not the first time Baidu has navigated a complicated transition."
"We believe in the mobile future, and that future is arriving fast. And Baidu is in a great position to meet the challenges and exploit the opportunities brought by this PC to mobile evolution."
"This shift will also require a period of retooling and customer education as we show them how to take full advantage of the mobile internet opportunity. We are fully committed to pushing this transition forward and confident that our efforts in mobile monetization will pay off in the long run".
"I want to emphasize that there will be a transition period lasting a couple of years before the mobile monetization gap will close."
After listening to comments like these, one can't help but think that the 800lb gorillas looks vulnerable for the first time in a long time. Do you think it is a coincidence that Qihoo's (QIHU) most likely over hyped threat is occurring during the mobile transition headache? I don't think so. But while I am not seriously concerned about Qihoo becoming a thorn in Baidu's backside, I am worried about the mobile monetization disease emboldening competitors. Google is probably looking at this situation right now and sniffing an opportunity. How hard would it be for them to throw some of their muscle behind Qihoo at this stage or even reevaluate entering the market? Baidu's management team has to be thinking about these things, and they have to be worried about how the landscape will look a few years from now if they don't manage this transition to perfection.
While Sina (SINA) might not be generating Baidu like profits, they do have something that Baidu doesn't have, China's hottest web property. Sina Weibo has taken China by storm over the past few years and has slowly woven itself into the heart of the nation's technological culture. You can credit Sina management for this as they have done a fantastic job of copying the old Zuckerberg playbook and focusing on the user experience at the expense of monetization. And this experience has become highly mobile in nature...
"Among the daily active users, 69% used the mobile terminals to access the Weibo in the month of June, as compared to 64% in the month of March." Sina Q2 CC
With roughly 70% of Weibo's 37 million daily active users accessing the service via a mobile device, Baidu has plenty of reasons to consider making a defensive acquisition here. Because if Weibo was to fall into the wrong hands, you can guess who, Baidu's mobile headache might turn into a ruptured cerebral aneurysm.
But maybe Baidu has figured this out already.
Over the past few months Baidu has made some interesting moves.
1) They shut down their Weibo service
2) They bought out Providence Equity Partners' stake in online video platform iQiyi
3) They filed to sell two tranches of senior notes
Buying Sina wouldn't be a giant leap from here. At a current enterprise value of less than $3billion, Sina is worth one tenth of Baidu and thus would make for a sizable but affordable acquisition. And my guess is Sina would be quite receptive to the deal as Baidu's search moat and financial muscle would allow them to accelerate their monetization plans.
Honestly, when you think about it, it is hard to come up with any reasons why this marriage shouldn't happen sometime soon.