Baidu's Search Zooms On, Seeks Xiaomi Spirit

| About: Baidu, Inc. (BIDU)

Search leader Baidu (Nasdaq: BIDU) may be rapidly yielding market share to 2 up-and-coming rivals, even as its latest results show it's still king of the hill when it comes to getting revenue from online advertisers. But the company is still searching for new innovation, with word that charismatic Xiaomi co-founder Lei Jun came to speak at an internal event this week as Baidu seeks to rekindle its own "wolf spirit". Baidu's quest to become more diversified has moved into high gear with a spree of major acquisitions over the last year in a wide range of areas. Still, its latest results, while impressive, show just how heavily dependent the company remains on online advertisers.

Baidu's latest results show that revenue zoomed 50 percent in the last quarter of 2013 to $1.6 billion, with nearly all of that coming from online advertising (company announcement). The growth rate marked an acceleration from around 40 percent in each of the 2 previous quarters. And perhaps most importantly, Baidu forecast the growth would accelerate further still in the first-quarter to an increase of 55-60 percent.

That kind of growth is no easy feat when you're a company of Baidu's size, and attests to how efficient the company has become at getting revenue from online advertisers. The forecast also shows that Baidu's growth hasn't peaked just yet, in contrast with other advertising-dependent Internet companies whose growth looked set to plateau in the current quarter and potentially decline through the year (previous post). Investors welcomed Baidu's bullish forecast, with the company's shares surging 7.7 percent in after-hours trade after the results came out.

While the revenue growth was strong, investors chose to largely ignore a less rosy picture for Baidu's profits, which contracted slightly in the fourth quarter after anemic growth in the previous period. Baidu has been spending heavily to build up its mobile search business in the last few quarters, and its steady stream of recent acquisitions also probably contributed to the lackluster profit performance. Its recent purchases include an app store, a group buying site and an online video operation, as it tries to diversify its revenue stream to better compete with China's other 2 leading Internet firms, Alibaba and Tencent (OTCPK:TCEHY, HKEx: 700).

Baidu's founder Robin Li, one of China's richest men, made headlines in late 2012 when he wrote a memo about the "wolf spirit", calling on the company's complacent employees to take more risks and innovate (previous post). Baidu has certainly made plenty of acquisitions to diversify its revenue stream over the last year, but Li is still worried that workers at the company's core search business still aren't innovating enough. I say that because one of my sources tells me that Li apparently hopes to build a corporate spirit more similar to dynamic smartphone maker Xiaomi, whose CEO-- Lei Jun-- gave a motivational speech at Baidu this week. Lei's speech, titled "How Xiaomi Was Forged", was attended by many of Baidu's high-level executives, and touched on Xiaomi's strategies that have contributed to its phenomenal success since its founding just 4 years ago. Unlike Baidu, which won its position as China's leading search engine through its early entry to the market, Xiaomi has had to score its success in a crowded and highly competitive field of smartphone makers.

The fact that Li invited such a high-profile motivational speaker to talk to his top executives shows that he's still not convinced his employees have rediscovered their wolf spirit. That could mean trouble ahead as the company faces unprecedented challenges from Qihoo's (NYSE: QIHU) fast-rising search service, as well as Sohu's (Nasdaq: SOHU) Sougou. But for now at least, Baidu is showing no signs of yielding its leading position in search revenue, even as it continues to look for its wolf spirit.

Bottom line: Baidu's revenue growth looks set to accelerate into the first quarter, even as it continues searching for its wolf spirit amid threats from fast-rising rivals.

Disclosure: No positions