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Baidu (NASDAQ:BIDU) is the world's second largest search engine company with most of its revenues coming from one single market. Baidu has copied world's leading search engine company, Google (NASDAQ:GOOG) in almost every aspect of its business model. The company is even copying Google's new products and services to increase growth. I have been negative on the company's prospects for some time. The main reason is that Baidu's search revenue growth has been sharply slowing down. The company is totally lacking in innovation and copies leading American technology companies.

While this might give the company revenues in its protected domestic market, Baidu has completely failed to expand outside of China. Its products and services are second rate compared to Google, Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and others. The only place it has been successful is China, where the government does not allow a level playing field. Baidu has managed to keep the Chinese apparatchiks in good humor and that has been one of the biggest reasons for its success. The company reported another disappointing set of quarterly results which led to the stock falling sharply. I would continue to avoid Baidu as I don't see a bright future for the company.

Why you should sell Baidu

Recent results have been quite bad

Baidu has disappointed repeatedly with its quarterly results. The stock is now trading near its 52 week low of ~$82 after missing market estimates. The company's growth trajectory is coming down faster than expected which has led to its stock price getting hammered. The stock fell by more than 7% after its CQ113 results. The company managed to increase its online customers by only 1% from the last quarter. Revenue per customer was down by 6%. The traffic acquisition cost is also increased growing from 7.8% in Q112 to 10.6% in Q113. Other costs like bandwidth and content costs also showed a sharp increase.

The days of high flying growth in China are over

Baidu is completely dependent on China for its earnings and revenues. The growth trajectory in search advertising has been declining sharply, and Baidu's valuation has shown a similar trajectory. Baidu's revenue growth had halved to 42% in Q412 and fell further to 40% in Q113. The company has no presence in faster growing emerging markets to offset the Chinese revenue decline. It essentially remains a one trick pony that cannot be taught new tricks.

Mobile Transition is proving painful for Baidu

Baidu's market share in the mobile phone search segment is not even half that of its desktop market share. The company faces more competition in the mobile search segment from companies like Qihoo (NYSE:QIHU) and Tencent. QHOO is the market leader in the mobile Internet browser space which has allowed it to become a major mobile search provider. Mobile CPC is also much smaller than the desktop CPC.

New Products and Services are second rate Copies

There are many companies that have tried to copy Google's products and services. All of them have been unsuccessful so far. Microsoft (NASDAQ:MSFT) has failed to provide effective competition to Google in Internet search despite pouring billions of dollars to develop its Bing search engine. Facebook (NASDAQ:FB) has also been trying to reduce Google's Internet advertising market share without success. Baidu lacks innovation and tries to copy the Western technology giants. Baidu has been late to the cloud computing space, though it is now investing a massive 10 billion yuan to build a cloud computing centre. It is copying Google and Amazon which have been the first movers in the market. Baidu is also introducing a copycat Google Drive.

Chinese hard landing

The Chinese economy faces a hard landing as the company's economy is dangerously imbalanced. Recent macro data suggests that the Chinese economy will decelerate quite sharply in the coming years. Industrial commodities have already seen a sharp decline due to those fears. Baidu remains a one trick pony dependent on China for almost every dollar it earns.

Stock performance

Baidu's stock has gone down by ~8% after the announcement of the Q113. The stock fell from ~$105 to ~$95 after the Q412 results. The stock has traded in a range of ~$82 to ~$150 over the last year.

Valuation is deceptively cheap

Baidu's valuation has crashed along with its stock price as its financial metrics are deteriorating. Not only is Baidu's growth coming down sharply, its margins have also declined. The company's costs have increased as Baidu has to spend more on new areas, even as competition increases in its core search service. The forward P/E has almost halved to 12.3x as growth estimates have plummeted. Baidu remains quite expensive if you use the P/S or P/B ratio. The P/S is 8.2x while the P/B is at 7x. In technology, we know that the earnings can evaporate suddenly, so I don't think that Baidu is cheap despite its recent fall.

Summary

Baidu's growth figures have repeatedly disappointed the market as the company faces multiple challenges both on the revenue and margin front. While Baidu has a monopoly-like position in the Chinese Internet search industry, the company is facing a painful transition in mobile search. The company has also lost market share in the PC and desktop segments to local competitors. There is always the danger of Google returning after a deal with the Chinese government. The company's valuation is still not cheap despite the price fall seen in the last couple of years. It has not been proactive in recognizing the new Internet trends. While I don't think that Baidu is a short at this point of time, the company is most definitely not a buy.

Source: China's Leading Search Engine Is A Falling Knife