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Summary

  • The growth in mobile has resulted in a considerable rise in net profits.
  • The online video market in China gives another outlet to the company to further grow its revenues, along with the launch of its TV box.
  • Short-term contraction in margins due to increased expenditure will result in long-term sustainability of earnings.

Baidu (NASDAQ:BIDU) is one of the fastest-growing technology companies in China, and it provides a good way to profit from the massive Chinese tech market. The company's revenues have been growing at a rapid pace, but heavy spending to promote mobile services have prevented the profits from rising. Baidu finished the last year quite strongly and recorded gains of 70% over the period. However, year-to-date, the stock is down about 10%, mainly due to the concerns about lower profit guidance for the full year as the company continued to spend on promoting its mobile segment. The focus on promoting its mobile segment should pay off in the long term, and it is not a bad strategy to sacrifice short-term profits for long-term growth.

Increasing the Presence in the Online Video Market

Baidu has been making solid moves into the mobile research, and the company has a number of mobile apps - at the moment, the focus is on increasing the company's presence in the mobile sphere of the country. One such move is a combined effort of Baidu with Rukaten, a Japanese video sharing website like YouTube named as iQiyi.

Baidu offers movies and television shows from Viki, as it has been expanding its video services to lure more users. Viki, a unit of Rukaten, the biggest Japanese e-commerce company, offers licensed content to Baidu video from around the world, with translations made by users into English and Chinese. The market for internet users seeking movies and TV shows online is massive, with 618 million potential customers. Baidu is planning to have an initial public offering for the iQiyi video website within three years.

Youku Tudou (NYSE:YOKU) is the main competitor for iQiyi, and currently has a market cap of $3.7 billion, with revenues of $479 million. Baidu has given a time frame of three years for the IPO, as the company wants to make iQiyi bigger than Youku Tudou, in terms of revenues and market share. If the company is able to achieve this goal, the management believes it will be able to get a better valuation than Youku Tudou. As a result, we expect aggressive marketing efforts by the company to achieve a larger market share over the next three years.

Moreover, according to the Internet consultant IResearch, the Chinese online video market will probably be worth 17.8 billion yuan ($2.84 billion) this year, and then double to 36.6 billion yuan ($5.85 billion) by 2017 - this is a substantial opportunity, and it should allow the company to enhance its revenues considerably over the next three years. Furthermore, Baidu is also looking to spend 300 million yuan ($48 million) this year to produce its own content, mainly focused on the younger audience.

Baidu's Own TV Box

Baidu recently launched its TV box named Shadow Stick 3. The box is powered by Android, and will be shipped initially in the local market during the current month -- it has a price tag of $65. This device has a cost advantage over its competitors, and is compatible with the latest gadgets, including 4K video decoding, and supports next-generation wireless game controllers, among other peripherals. The comparably lower cost and the next-generation technology will allow the company to attain a considerable market share.

A Look at the Earnings

Baidu recently announced its first-quarter earnings, which beat the analyst estimates - the company reported a year-over-year increase of 24% in net profits and 59% increase in the quarterly revenue. Analysts expected the company to post an increase of 5% in the net profit for the quarter. In the previous quarter, revenue rose 50%; however, the profits were flat due to heavy capital spending. The revenue from mobile devices, generated mostly from ads, contributed more than 30% towards the total revenues in the first quarter. Baidu expects higher total revenues in the second quarter, with a growth rate of up to 60%.

Conclusion

The company's efforts to have a larger share in the mobile market are already paying off, as Baidu reported solid growth in net profit. There is a lot of room for the company to grow, as the Chinese online video market is growing at a rapid pace, and it is largely untapped. Furthermore, the growth from the search business of the company remains strong. We believe Baidu is one of the best picks in the technology sector due to the rapid growth and monetization capabilities of the company. Short-term contraction in margins due to increased expenditure on promotions should result in long-term sustained growth in revenues and net profit of the company.

Source: Baidu Is Well-Positioned To Grow