Baidu (BIDU) announced its fourth-quarter earnings yesterday, which impressed the market in a big way. The stock went up 8% in after-hours trading, on top of the ~1.6% gain it recorded during the normal trading hours. I have been saying in my previous articles that the stock can be a very solid long-term buy due to the growth opportunities available to the company. The earnings and the future outlook have validated my optimism to some extent. I believe the company is entering a unique growth period, which can set it up for the years to come. Let's take a look at some of these opportunities.
A Glance at the Earnings
Before we talk about the future growth opportunities, let's first take a look at the earnings. The fourth-quarter results for the company showed the best growth figures in revenue over a year. Baidu reported fourth-quarter revenue of $1.53 billion, 50% above the same quarter last year. The revenue growth was even better than the company's own expectations. However, the growth in revenues could not be converted into growth in the earnings - the company reported almost flat growth (0.4% decline) in its earnings - the earnings for the fourth quarter were around $454 million.
If we were talking about a manufacturing concern or a mature company, the results would have caused a decline in the stock price as the inability to convert revenue growth into profits would have spooked the investors. However, we are talking about a technology company and these companies are valued on different metrics than the manufacturing or consumer goods companies. The main reason behind flat growth in earnings was an increased focus on the mobile - the company is spending heavily on promoting its mobile products, which has resulted in elevated operating expenses. However, these expenses are paying off as the mobile segment accounted for more than 20% of the total revenues for the company. We are likely to see more investment in the mobile segment as the company tries to capture larger market share. Marketing and administrative costs went up by around 135%, while R&D expenses went up by 80%.
One of the most important metric for any technology company is the number of online marketing customers as these companies derive majority of the revenue from online ads. The growth in the online marketing customers has been strong for the company. At the end of the quarter, Baidu had around 451,000 online marketing customers, 11% more than same period last year and 2.8% less than the previous quarter. Nonetheless, the sequential decline in marketing customers have not resulted in revenue per customer; in fact, it has improved 9.4% sequentially and 34.8% year-over-year.
An Assault on the Mobile Space
Baidu has the largest market share when it comes to the computer-based search in China. However, the company's share in the mobile space is very small compared to the computer-based search. At the moment, the Chinese market is the biggest when it comes to online search - there are 618 million online users in China - almost 500 million of these users go for mobile devices for their search needs - this represents more than 80% of the market. As a result, Baidu and its competitors are investing heavily in the mobile space and the competition is getting fierce.
Baidu is facing tough competition in mobile space from Qihoo, which introduced its search engine in 2012. However, the company is making some astute moves in order to fight the competition. During the last year, Baidu spent about $2.5 billion in buying two businesses in the mobile segment - App store of 91 Wireless in August, and the full takeover of Nuomi (I explained the impact of these two deals in this article) - Nuomi was previously 59% owned by Baidu. These two deals gave Baidu substantial foothold in the mobile segment and for the first time, mobile has accounted for more than 20% of the company's revenue. For the fourth quarter, Baidu reported 400 million daily active users for its mobile apps, up from 330 million in the third quarter.
Baidu is fighting with Tencent Holdings (OTCPK:TCEHY) and Alibaba - Baidu maps is in direct competition with Alibaba's AutoNavi and Tencent Holdings' WeChat is massively popular, which will also give some tough competition to Baidu. However, Baidu's growth in revenue from mobile suggests that the company is fighting its competition well. Furthermore, the company announced in the earnings call that the acquisitions in the mobile space will continue during the next year as Baidu tries to capture larger market share. Alibaba and Tencent have also been very active in the market which might result in higher acquisition prices due to the increased competition; however, Baidu's cash position of over $7 billion should allow the company to make necessary acquisitions. On the other hand, Tencent's cash and cash equivalents stand at close to $6 billion. The focus on mobile will certainly enhance the growth for the company as the future outlook indicates that it will start to see the benefits of these two acquisitions in the first quarter of 2014 - the company's outlook was above the estimates.
Baidu has been showing immense growth over the past few quarters, which has translated into the stock price. However, the company's strategy to get a larger share of the mobile space will go a long way in ensuring its long-term growth. The aggressive strategy in the mobile space will continue for the company over the next twelve months. At the moment, the revenue from the mobile segment also largely comes from the search business. However, the integration of 91 Wireless' app store will start to bring in revenues along with Baidu Maps. I believe Baidu is well positioned to grow and this might be the best time to buy this stock.