Baidu: Was A King, Is A King And Will Remain A King

Sep.11.13 | About: Baidu, Inc. (BIDU)

Baidu (BIDU) aka China's Google has showed solid topline growth in the last two years and has also rewarded investors with healthy returns. While the Chinese Internet market is heating up with many competitors and the focus shifting away from PC to mobile, the question remains: How will Baidu maintain its leadership position? Let's analyze this internet company, and discuss different monetization efforts to tackle the competition and capitalize on opportunity in the mobile market.

Bringing light to China

Baidu is a dominant search engine in the Chinese Internet market with about 80% of the market share in desktop searches, and more than 50% in mobile search. During its Annual Technology Innovation conference "Baidu World," Baidu launched a new mobile application, or app distribution model 'Light app,' in August 2013.

Light app is a platform that will allow users to access the apps without downloading the whole app. Now users can just query their search in Baidu's web or mobile portal, and the light app platform will display all relevant apps, including less popular apps, related to their search.

This platform will increase visibility of less popular apps, currently only 0.1% of apps account for 70% of the total app download, while the other 99.9% have to compete for the remaining 30%. Earlier only top-ranked apps appeared on the first and second search pages, while other apps had limited visibility.

Baidu has 700,000 app developers that could benefit from the free Light app platform to gain more user traffic and find the right target users.

We believe that the Light App could help drive Baidu's market share in both the mobile search and mobile app markets. We expect both mobile search traffic and revenue to maintain its strong growth amid the shift from PC to mobile, with PC search queries declining 5% in 2013 as estimated by Nomura.

Acquisition of 91 Wireless app store

In order to tap the mobile market, Baidu has decided to target the app store to strengthen its position. It has agreed to take over Netdragon's 91 Wireless, an app market, for $1.9 billion in August 2013. 91 Wireless app store is China's third-largest and has seen 10 billion apps downloaded since 2007. This will be beneficial for Baidu in the long run since the Google Play store isn't available in China, and Android play-stores have taken over iOS in the last two years. In place of the Google play store, China's Android app store is dominated by the app stores of Qihoo 360 Technology (QIHU) and 91 Wireless.

In addition, apps are faster than traditional websites and mobile websites in China since the Internet download speed is slow, therefore apps are more popular. China has a highest peak Internet connection of just 7.1 megabytes per second, or Mbps, in comparison to leader Hong Kong's 54.1 Mbps. Along with its app and 91 Wireless app market, which has a market share of 15.6%, Baidu plans to close its gap with Qihoo, which has a market share of 27.4%.

Nomura, a financial services company, has estimated that mobile revenue could represent 15%-20% of its total revenue by the fourth quarter of 2013 from 10% in the second quarter of 2013. We believe that Nomura's estimation is achievable as Baidu's mobile search saw traffic grow 16 times from 2010 to present. It has also recorded 465% year-over-year increase in its mobile search app downloads last year.

Mobile monetization will gain momentum with the company's ongoing efforts, and advertisers will migrate to mobile once they see huge mobile traffic.

Rise to the challenge

In order to strengthen its mobile monetization effort, and diversify its business away from desktop search, Baidu has entered into a definitive agreement to buy a 59% stake in Nuomi Holdings Inc. from Renren (RENN). Nuomi is a wholly owned subsidiary of Renren. The deal is worth $160 million and is expected to close in the fourth quarter of 2013. Nuomi is China's fourth-largest group-buying website with 3.8 million active users and derives 30% of its sales from mobile devices. Group sites allow users to purchase products and services at a discount, on the condition that a certain numbers of users make the purchase. The investment in Nuomi will strengthen its location-based services, or LBS, and maps due to Nuomi's strong LBS capability.

Renren is looking to enhance Nuomi's market share through the sale of Nuomi, and it expects to benefit from Baidu's dominance and expertise in the Chinese Internet market.

Nuomi reported a loss of $27.30 million in 2012, and assuming similar losses for Noumi this year, it is expected to dilute Baidu's EPS by around $0.08. However, Noumi has shown significant growth potential and experienced a 69.4% year-over-year increase in its revenue in the second quarter of 2013. Looking at the revenue growth, Noumi can turn around and report profits in the next two to three years.

Going forward, Baidu's Light app, combined with Nuomi, could pose threats to other search and e-commerce services.

Fight in search market

Qihoo 360 Technology is the second-largest player in the Chinese search market after Baidu and has a market share of around 17.5%. It achieved significant growth since the launch of its search services in August 2012 and its partnership with Google in 2013, using Google's expertise in online ads to gain additional market share.

Currently, Qihoo is focusing upon improving its 360 search browser. Previously, users had to type the whole URL in order to visit a particular website. Now, users can type keywords and results will be shown on Qihoo searches, which will save time and increase traffic. The company has targeted 20% search traffic market share by 2013. We think that management target of 20% is realistic, as it has almost doubled its share from 9.8% in 2012. Going forward it will continue to gain more market share.




Trailing P/E










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(Source: Yahoo Finance)

Looking at Baidu, which has a market share of 80% and earnings growth rate of more than 85% in the last five years, anyone would assume that this stock would be trading at a high valuation. However, valuation metrics present a completely different picture. Its EV/EBITDA is the lowest among its peers, apart from Renren, which has a negative EV/EBITDA due to its net losses this year. Qihoo is trading as high as 4.6 times Baidu's EV/EBITDA, indicating Baidu is currently trading at quite a bargain.

It is monetizing the mobile segment with the acquisition of the 91 Wireless app store and the launch of its Light app. Its competitor Qihoo is also in the race to capture market share in mobile searches and is gaining market share. However, it is trading at a very high P/E of 167.16, more than double the industry's P/E of 82.2 and almost six times Baidu's P/E. At such a valuation, Baidu seems very attractive for investors.

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.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Rohit Gupta, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article