China's largest and strongest search engine company, Baidu (NASDAQ:BIDU), faces one of the best opportunities, which is created by the deteriorating real estate market in China.
I believe that the technology giants in China are like hyenas that will take over the existing conventional business whenever they have a chance. Chinese technology companies are aggressive in their nature. Take a look at Baidu and Alibaba's money market fund products that offer to the public through their platforms. Not even the Chinese banks can match up with 5% plus dividend. The following reasons are why I am long Baidu.
1. The deteriorating Chinese real estate market means more discretionary spending by the younger generations
It is true that the younger Chinese generations don't save up as much money as their parents do. Discretionary spending can have a significant impact on Baidu's business, which is largely exposed to daily routine consumer spending. Baidu successfully gets itself in the cockpit of China's mobile search business. As most young Chinese people spend less money on one of their biggest purchases of in their lives, they will certainly spend more money on pleasures. In addition, mobile phones are the first thing many of us wake up with. Think of how Baidu can benefit from this "bizarre" behavior.
2. Baidu is a much more focused technology giant than its competitors
Baidu does acquisitions around its core. Baidu bought 91 Wireless from Net Dragon last year to gain more market share of the Chinese mobile market. In 2011, Baidu invested 306 million dollars in Chinese travel website Qunar.com (NASDAQ:QUNR). QUNR was successfully listed on Nasdaq November last year. Baidu also acquired companies like PP Stream and iQiyi.com, which could have helped Baidu to gain significant shares in video search. Last but not least, Baidu bought Nuomi.com to enter E-commerce business. All these acquisitions are made around the core business, which is the search engine of course. Baidu still has a lot of room to grow in China as the country is still investing massively into telecommunications and information technologies.
3. The travel market in China is still at the booming stage
Qunar.com is now the 2nd largest travel website after Ctrip (NASDAQ:CTRP) in China. The market is far away from saturation. Baidu with Qunar have the upper hand as Baidu's massive traffic will help Qunar benefiting from the mobile phone growth.
Qunar targets those who want to be economic when they travel. The real estate decline will unleash more discretionary spending that will eventually flow to the travel market. Qunar's growth rate is expected to be 78% and 63% for 2013 and 2014, respectively. Although the company still has not made any real profits yet, many believe that Qunar will eventually gain massive market share, which the intangible value to Baidu is precious enough to make it a very valuable asset.
4. Baidu is one of the safest ways to invest in Chinese Internet industry
There are simply no other technology companies in China that can have such a large traffic volume. Although Qihoo (NYSE:QIHU) has acquired a piece of the search engine market from Baidu, it doesn't seem that Baidu is slowing down because of the unexpected rival. Search engine indeed is a good business after you are the monopoly. After all, people only need one search engine service. Baidu will probably keep growing around 40% for at least a few years ahead. It's just a matter of time that Baidu makes 100 billion dollars in revenue. Recently, Baidu issued its new 1 billion 2.75% note due 2019. Baidu has more than 6 billion dollars cash or cash equivalent and I can already sense the smell of a round of acquisitions overseas.
Baidu has been a private equities lover. Many large private equity managers have been working hard to get a bite on it.
I have no reasons not to invest in Baidu. It has its tentacles laid on almost every corner of the Chinese Internet business. The recent valuation is fair with only 17-18 times of the projected earnings next year. Regardless of the declining real estate market in China, I am long Baidu and I think it will continue to perform well.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BIDU over 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.