Baidu (NASDAQ:BIDU) is the leading online search provider in China and it derives around 60% of its revenues from search advertising. The Chinese search advertising market has reached a more mature phase after witnessing heavy growth over the past years. In 2012, the market grew by 49%, as compared to 55% and 67% growth in 2010 and 2011 respectively. Over 2013-2016, the growth rate is further estimated to slow down to a CAGR of 24.6%.
Baidu has a market share of around 80% in the Chinese search market. However, we expect this figure to decline in the future on account of growing competition from newer players such as Qihoo, as well as rising adoption of mobile Internet in the country. Baidu has a lower market share (35%) in the mobile search market. We believe Baidu's efforts to bolster its mobile platform will not lead to significant growth in its mobile market share in the short term as the mobile search market is more fragmented.
In this article, we look at the historical and future growth rate of the Chinese search advertising market and how Baidu's market share is expected to trend in the future.
What Is The Size And Estimated Growth Rate of Online Search Advertising Market In China?
The online search advertising market in China has a reached a more mature phase after experiencing heavy growth over the last couple of years. According to iResearch, it grew by 49% in 2012 to reach 25.6 billion yuan ($4.1 billion). This compares to an annual growth rate of 55% and 67% in 2010 and 2011 respectively.
The growth rate is estimated to further slow down over the coming years. During 2013-2016, the Chinese online search advertising market is estimated to grow at a CAGR of 24.6% to reach 67.2 billion yuan ($10.7 billion). In addition to market maturity, the slower pace of economic growth in China and difficulty monetizing the mobile platform are some of the other factors that contribute to the decline in growth rate.
What Is Baidu's Market Share In The Online Search Market And What Is Its Outlook?
Baidu is currently the leader in the Chinese online search market with a market share of around 80%. However, the company is facing increased competition from newer players such as Qihoo, which is gaining popularity in the market. Qihoo, which was launched in August 2012, has already gained 10% share in the market. Qihoo's management aims at growing this share to around 20% by the end of 2013.
Baidu is also facing difficulties due to growing usage of mobile Internet in the country. Baidu has a lower market share (35%) on mobile devices. The mobile search market is fragmented with presence of players such as Tencent and Easou, having market shares of 23% and 22% respectively. While Baidu is making efforts to bolster its mobile offering, it is also facing challenges related to monetization of mobile platform.
We think these factors will lead to an erosion in Baidu's market share in the future. If Baidu's market share in China's search market drops to 65% by the end of our forecast horizon, it represents near 10% downside to our $115 price estimate for Baidu's stock. Our price estimate is around 35% ahead of the market price.
Disclosure: No positions.