Baidu (NASDAQ:BIDU) will report earnings next Thursday (July 24th) with consensus expecting $1.28 in EPS and $1.92b in revenue. I recently initiated on Baidu with a $172 target highlighting that mobile investment could be longer than expected given Baidu's checkered track record in mobile and that branching into non-core verticals (ie. internet finance) is more of a distraction rather than a sustainable revenue stream. Please see my note: Baidu: Time To Take A Break; Initiating With $172 Target.
I am reiterating my bearish view of the stock heading into the Q. While near-term revenue is achievable, investment in mobile will continue to weigh in on earnings. In addition, competition from the Sogou/Soso, Alibaba and Qihoo (NYSE:QIHU) will prolong Baidu's plan of successful mobile monetization. I note that Alibaba recently announced a JV with UC Web to form "Shenma" search app to compete in the mobile search space. According to Enfodesk, UC Web accounts for 42% of China's mobile browser market, compared with Baidu at 20%. In my view, Shenma could become a meaningful competitor against Baidu given its larger user and install base. Successful integration with Alibaba's vertical products (ie. mobile map, payment, ecommerce) could provide further headwind to Baidu.
Besides Shenma, the Sogou/Soso search platform from Tencent/Sogou partnership is finally bearing fruit with monthly active user +35% y/y in May vs. flat for Baidu, according to iResearch. Over the same period, time spent has increased by 80bps y/y while Baidu's time-spent declined a whopping 600bps, indicating that the new entrants are taking a toll on Baidu's competitive standing.
Finally, Qihoo's launch of its own mobile search app will no doubt weigh in on Baidu given Qihoo's 500m+ smartphone install base. In short, the current mobile competitive landscape is unlike the one we witness two years ago when Baidu was the clear leader compared with subscale player such as Sogou and emerging player like Qihoo. The competitive landscape of today is between Baidu and a much stronger Sogou (with the backing of Tencent), UC Web (with the backing of Alibaba) and Qihoo (which already has meaningful 15% of China's web search time spent market share.
China's mobile search only accounts for 27% of the country's search market and I believe there are still upside growth, which means that Baidu should either ramp up on R&D to create more effective search and ad platform, or consolidate the smaller players via M&A. While the street applauded Baidu's less acquisitive strategy while Alibaba and Tencent went on their shopping spree, it is evident that such prudent approach is placing Baidu at a tough spot to compete against the new entrants. With ~RMB40b in cash, M&A seems like one way for Baidu to maintain its competitiveness.
In conclusion, I reiterate my bearish view on Baidu despite positive near-term traffic growth. Long-term competitive pressure remains a key risk.
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