Baidu (BIDU) is in an interesting transition right now. While it does boast good numbers and a lion's share of the PC search market, its journey into the mobile market will dictate a lot of its revenue in the future. The opportunity is great but the market is still young and developing. Let's take a look at where the company is now, the potential for growth and what it faces in the future.
Baidu has two legs in this search advertising revenue model. One leg is from PC searches where it boasts an 80% ownership of the market. But this is expected to decline as competition picks up from companies like Qihoo. I don't believe this should be a surprise as it is a natural progression of things. The second leg is in the growing mobile market where it has about a 35% market share which is not expected to significantly grow because competition is a little fiercer and fragmented in this growing market. There are other players like Tencent (OTCPK:TCEHY) (23% market share) and Easou (22% market share). Despite this, there is still great potential in China for years to come because of the size of its population and its growing wage structure. Look at some of these statistics:
- There are about 800 million people accessing the internet in China, around 75% of this number is through mobile technologies.
- Mobile technologies have allowed poorer consumers to still gain access to the internet and meant that the online market place in China has become gigantic.
- It is estimated that around 220 million people shop regularly online in China.
- 90 million Chinese are expected to book holidays online this year.
- 350 million are online gamers (more than the population of the entire USA)
- 200 million Chinese do internet banking.
Chinese Internet Search Market Slowing
Even though Baidu owns a large share of the PC advertising search market, it understands that the fastest growth is behind this industry. Considering that Baidu derives about 60% of its revenue from this income stream, it would be important for investors to understand this market is shrinking. Growth numbers are still phenomenal compared to United States standards even though they are shrinking. Keep this in mind. In 2012 the market grew by 49% as compared to 55% in 2010 and 67% in 2011 respectively. The years of eye-popping growth may be over though as growth is expected to slow from 2013 to 2016 to an average of 24.6%.
Qihoo - Baidu's Main Competitor
This company launched its online advertising in August 2012 and presently is boasting a 10% market share with a goal in mind to have 20% of the market by the end of this year. The company's approach to set itself apart from Baidu was to stay away from medical related ads to not interfere with search engine results. It is obvious that both of these marketing plans are direct jabs at Baidu. In 2010 Baidu was involved in a counterfeit drug advertising scandal and then in 2011 it was accused of manipulating search results by placing certain companies higher in rankings if they paid more. It will be interesting to see if the company can reach the market share it boasts it is striving for. By 2015 it expects own 40% of the market. It may not be as easy as they think.
"Zhang Xi, China-based analyst at iResearch, said the Chinese search market had stabilized a few months after Qihoo's entrance with Baidu's market share at around 80 percent. She said the online search market for China will likely remain the same in 2013."
Baidu Continues to Remain Profitable
It is a huge market and Baidu continues to rake in profits, as can be seen by its fourth-quarter numbers. The company's net profit for the last quarter of 2012 was $445 million on a 41.6% revenue gain from the same period a year before. Its online advertisers also grew by 30.5% year over year. While this is all well and good, the real challenge continues to be the mobile market which is growing by leaps and bounds in China. With 420 million people in China tapping into the mobile market, bringing its services to the mobile Internet arena is not easy. The company adds new features to its mobile search engine almost on a weekly basis, but it has yet to contribute any meaningful revenue to the company. This is a work in progress for the Chinese culture as businesses are playing catch-up and only a small amount have been able to adapt and optimize their online sites for smart phones or tablets. It is not a small task to face, and I am of the opinion it'll take a couple years before the evolution of mobile search, business advertising optimization/site development, and network development meet together to make a meaningful growth in mobile revenue generation.
There is no doubt that Baidu is in a bearish pattern and has been for a few months but there are also signs showing that it could reach a bottom soon. I can see positive divergences developing in the RSI indicator and the MACD. Obviously I would want to see both indicators move to the bull sides of their middle lines to show strength in an upward trend. The stock has used the middle Bollinger band as resistance and now I want to see if the stock can build a foundation and push through that middle band on a move up. These are my observations, but they are still premature and I cannot say whether the stock will turn bullish at this point or not.
From a short-term perspective I believe Baidu will continue to bring in revenue and have healthy-yet conservative growth compared to what it has in the last few years. The company will also continue to invest heavily in its mobile market because it knows this is where a large portion of its revenue will come from. But this market in China is still fairly infantile and will take a number of years to develop and grow between Internet providers and businesses adapting to the Chinese culture using mobile devices. So I do not expect any significant growth in this company for the next few years until we see how the mobile advertising search market in China develops and grows.