Chinese Internet search behemoth Baidu (NASDAQ:BIDU) has got off to a bad start this year. Baidu's shares are down 13% so far in 2014 as mixed fourth-quarter results have weighed on its performance. When Baidu posted its fourth quarter results in February, it delivered an increase in revenue, but declining profits.
Hitting a bump
Baidu's revenue was marginally above consensus estimates, but profit came in way below analysts' expectations due to higher operating expenses. Moreover, management didn't give any guidance on profit growth this year, and anticipates the margins to drop by another 11%-12%. Considering that Baidu trades at an expensive 31.6 times earnings, while its American counterpart Google (NASDAQ:GOOG) is cheaper at 29 times trailing, is Baidu a good investment? Let's find out.
Baidu is expanding its product offerings and has entered into an investment phase. The company is transitioning to mobile as it sees strong growth in this area. However, investments in mobile have weighed on Baidu's profits and led to a rise in operating expenses. But, these investments could reap fruit in the long run.
Expanding the horizon
Baidu has made significant progress by entering into new areas and has expanded its product portfolio. It has invested heavily to build its position at gateways to the Internet, especially in mobile. This reflects in the fact that at the end of last year, Baidu had 14 apps with more than 100 million active users, and to top that, 20% of its fourth-quarter revenue was generated from mobile.
At the beginning of 2013, Baidu's mobile customers were not very high, with mobile-optimized landing pages being very low. So, Baidu undertook a lot of effort to educate its customers about mobile search and provided them with infrastructure, like its integrated billing system, or tools like site-apps and reporting tools to measure ROI across channels.
But at the end of the day, search is Baidu's core business and the company is looking to dominate in both PC and mobile. But, Baidu is also eyeing opportunities beyond its core competence area as the Internet's role in the real economy continues to expand. Consequently, apart from search, Baidu is focused other areas such as mobile and cloud, location-based services, consumer products such as gaming, music, online literature and social, and international growth.
Focus on products
Baidu is mainly focusing on technological innovation and user experience, which places it above its peers, and users throng to Baidu irrespective of the channel. The company is looking to offer excellent features for customers such as cross-channel, end-to-end marketing solutions and brand building. These innovations have helped the company generate a higher number of clicks, which in turn should increase its profitability going forward.
Moreover, Baidu's Translate app has been a big hit with users as it allows both image recognition and translation. It enables users to take a photo of an object, have it identified, and see results in both Chinese and English. Also, Baidu Maps is delivering strong results, and has 54% market share in China according to CNIT.
Baidu is also focusing on safety and security of its customers. As part of this, it had introduced the Plus V customer verification program in the second quarter last year, and by the end of fourth quarter, all its active customers have been Plus V verified.
Baidu has also focused on acquisitions for growth. It has acquired e-commerce site Nuomi. According to management, "The addition of Nuomi to our ecosystem brings huge strategic value to our overall e-commerce and LBS offering." The company is confident that its huge user base and strong distribution channel along with Nuomi's expertise in group buying and a sales force that's focused on local merchants should generate robust value for Baidu users.
Looking forward, Baidu plans to expand into other areas such as second-hand cars and lifestyle services. Baidu is pleased with its progress so far, but the company will continue to invest to improve its products.
Fundamental view and final words
Baidu has a debt of $2.8 billion, which seems quite manageable given that the company has cash of $6.13 billion on the balance sheet. In addition, Baidu generates strong cash flow that it can use to invest in the business. Also, over the next five years, analysts expect Baidu's earnings to grow at a solid 21% per year, which makes its trailing P/E of 33 look relatively fair.
The company is making investments to improve its business, and this is creating a dent in the earnings. But, looking at the long term, these short-term pains should help Baidu deliver greater value. So, investors should keep this stock in their portfolio and consider capitalizing on the recent drop in the share price by buying more shares.
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.