Forget Qihoo: Baidu Is Still A Buy

| About: Baidu, Inc. (BIDU)

Since my previous "buy" recommendations for Baidu (NASDAQ:BIDU) earlier in the month, the stock has posted massive gains of nearly 45%. These moves have been driven by a few different factors, the latest of which was the company's second quarter earnings report, which showed some signs of progress in key business segments. In recent years, Baidu stock has taken a beating, largely as a result of major gains in market share from new competitors like Qihoo (NYSE:QIHU). But with a clear re-positioning of the company's focus (to take on neglected areas like mobile search services), this period of decline is now clearly in the rear-view mirror and the stock is now on a trajectory to make a continued bull run when viewed on long-term time horizons.

When we look at the details of the second quarter earnings release, revenues rose to $1.24 billion, which is a massive gain of nearly 40%. In addition to this, company guidance was largely optimistic, centering on the positive prospects seen in areas like mobile search and in guiding its substantial ad customer base to new media outlets. On the negative side, we did see quarterly profits drop for the first time since the company entered public markets. Second quarter profits were lower at $430 million ($1.22 per share), which is a decline of 4.5%. But these declines came largely as a result of the money spent to restructure its business in areas of prior weakness. For the quarter, 10% of the company's revenue came from mobile operations (another first for the company), and this will help to dispel some of the common criticisms the company has seen in the last few years.

Baidu's Next Steps

Baidu's consistent strength is in its desktop search applications, as this is how nearly all of its revenue has been historically generated. But with recent acquisitions, such as the decision to purchase 91 Wireless for a $1.9 billion price tag helps make it clear that the company understands the need to branch out into other outlets that are more directly connected to the shifts in consumer demographics, positioning mobile devices in a much more central role.

Of course, some challenges for Baidu still exist. The market as a whole is still in the early phases of finding ways to monetize mobile search and the company will need to find inventive ways to add new revenue sources from its smartphone users. Most of the available data suggests that these customers are prepared to pay for game software and other paid-apps, and Baidu will need to make improvements in the ways it approaches users to gain interest in these products. Baidu's upwardly revised forecasts now suggest an expectation the company will see third quarter revenues in the neighborhood of $1.45 billion, a substantial improvement on the $1.34 billion consensus Wall Street had forecast previously.

Whether or not these more bullish projections are realized will depend on Baidu's ability to gain traction in app distribution, online video outlets, mobile search, and mapping programs that will enable ads to link more directly to the location of the user. Qihoo still remains Baidu's biggest threat in some of these areas but is still seen as lagging far behind in both revenue and total traffic. This, and Baidu's attractive P/E of 25, suggest long-term bull gains are still on the horizon -- even with the massive run-up in stock prices we have seen this month.

Chart Perspective

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This month has seen massive gains in BIDU, with the stock posting new highs for the year just below the 130 level. The recent succession of higher lows suggests that the longer-term downtrend has run its course. But with prices seeing short-term moves like this, it makes sense to wait for corrective pullbacks before getting long again. First area to watch for new buy positions is in resistance turned support, back toward the gap area at 114.60.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.