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Baidu (NASDAQ:BIDU) is China's version of Google (NASDAQ:GOOG) except that it's being outpaced in growth by another tech rival called Qihoo 360 (NYSE:QIHU), which is one of China's fastest growing companies. Qihoo is quickly taking search market share away from Baidu and has already met its year-end goals in online traffic. Even so, Baidu is still the search leader in China and its stock is trading at a reasonable multiple while fundamentals are healthy enough for more gains.

2013 Q3 Earnings

While Baidu's most recently reported third quarter revenues grew by 42.3 percent to $1.45 billion year over year, Qihoo's revenues grew 124 percent for the same period. Baidu projects a 49.6 percent increase in revenue for Q4. Operating profit was up 1.2 percent to $545.4 million while net income inched up 1.3 percent to $498 million. The company's marketing costs on mobile to compete with Qihoo increased by 115 percent from the previous Q3, following 77 percent and 83.5 percent increases in Q1 and Q2 respectively. Mobile advertising only accounts for 10 percent of the company's search revenue. Baidu held onto 63 percent market share in desktop searches in the third quarter.

CFO Jennifer Li reported that the company's main expenses for the quarter involved merging streaming video platforms PPS with iQiyi, the acquisition of 91 Wireless, research and development and promotional costs for mobile products. Li stated that the company's mobile investment is on a solid trajectory, despite mobile monetization lagging the company's PC revenue. Baidu plans to aggressively invest in mobile products the next two quarters.

Stock Action

Shares rose over 5 percent following the Q3 report and continued to rise to all-time high levels near $170. The positive market response was attributed to Baidu beating both Wall Street revenue and guidance expectations. The stock has since pulled back slightly in the $160 to $165 range. Part of the excitement has been that sales have increased four consecutive quarters year over year. Baidu is now trading about 34 times earnings with a market cap of $57 billion compared with Qihoo 360, which is trading at about 109 times earnings with a market cap of $9.8 billion. While Qihoo 360 has more than doubled its share value in 2013, Baidu has nearly doubled from its January price of $90.

High Expectations

Thomson/First call reports analyst price targets for the stock that are exponentially higher, ranging from a low target of $500 to a high target of $1352 with a mean target of $1093. Not many other stocks have such optimistic forecasts. Naturally, the overall sentiment is a buy recommendation. Zacks, however, has a more down to earth forecast, ranging between a low target of $97 and a high target of $222. Zacks has been gradually raising its earnings estimates for the full year the past three months.

Building Brands

The recent Baidu Moments Marketing Ceremony was held on November 21 in Beijing, in which American marketing expert Professor Don E. Schultz made a presentation at the second annual event. The event focuses on key moments affecting consumer behavior. Schultz said he believes China is going through a marketing revolution of digital era brand building. He alluded that even though China lags in the development of marketing theories, Baidu is helping to pave the way for this marketing revolution. He explained how Baidu helps build brands by delivering brand information to consumers and building relationships. The search engine currently reaches 90 percent of internet users in China and answers 5 billion search queries per day.

Acquisitions

Perfect World is an online game operator that has attracted interest from Baidu, which is looking to acquire its literature, comics and animation unit Zongheng.com. Even though no price has been reported yet, rough estimates are in the tens of millions of dollars. The site delivers self-published content, which could counter complaints that Baidu sites encourage the sharing of pirated content. This deal represents a cooling off of acquisitions for the upcoming year as bigger deals are starting to dry up. In August Baidu announced it would acquire 91 Wireless Websoft for $1.9 billion from NetDragon, which was the company's last big merger announcement. 91 Wireless is one of China's leading mobile app marketplaces and mobile game operators. Shortly afterward Baidu announced it would invest $160 million in Nuomi Holdings.

Conclusion

Baidu has growing competition in the mobile market, in which it's just beginning to plan for, while overall it remains one of the top high flying tech stocks that keeps moving higher regardless of what other players are doing to its market share. Baidu is a strong company that dominates the search market so it only makes sense that it follows the path of Google. Most analysts are in agreement that the company's outlook is positive and the stock has more room to grow.

Source: China Search Leader Baidu Keeps Advancing