By Sean Geary
Earlier this week, Baidu (NASDAQ:BIDU) reported earnings and guidance that largely disappointed market participants, resulting in a 10% plunge. Is now the time to jump into this beaten-down search engine?
Baidu, often referred to as the "Google of China" by American pundits, has seen its market dominance in its home market challenged recently. The firm had dominated Chinese search since Google's (NASDAQ:GOOG) 2010 exit. However, as smartphone growth has exploded in the Middle Kingdom, a significant chunk of the search market has gone mobile, not necessarily to the benefit of Baidu.
The emergence of mobile search has opened the door to new competition -- in particular, relative newcomer Qihoo 360 (NYSE:QIHU) has grabbed 10% of market share. While Baidu's 60% share of search remains impressive, these numbers represent a year-over-year decline. Also, as others have prognosticated, the company has been forced to drastically increase its spending in an attempt to fortify its mobile search position. Like Facebook (NASDAQ:FB), Baidu has also struggled to effectively monetize its extant mobile users. Consequentially, Baidu has invested heavily in mobile advertising technology, but the company has yet to stem the decline in revenue growth.
As indicated in its earnings call this week, Baidu's revenue growth slipped from 82% year over year in the fourth quarter of 2011 to 42% in the fourth quarter of 2012. With guidance coming in for next quarter at 38%-43% growth, this trend looks unlikely to reverse in the near term. Technically, as pointed out yesterday, this stock is broken and looks like a test of December lows may be in the cards. Such a drop could provide a compelling short- to medium-term investment.
However, Baidu's long-term future looks a little more complicated. While the company offers an Internet portal with a wide array of internet services, Baidu doesn't have the innovation chops that Google has. While the future profitability of endeavors like Google Fiber and unmanned vehicles remain a large question, there's little doubt that the people at Google have the potential to create the next disruptive technology.
On the other hand, there is little tangible evidence that Baidu could produce the next game-changing platform. Baidu's weak search algorithms, reliance on tacit government protection, and inability to create the next big thing could see the company left behind in the Web 3.0 era.
Disclosure: Author is long BIDU call spreads; author may initiate a short position in BIDU over the next 72 hours.