Baidu: Investment In Mobile Paying Off For Company

Jul.30.14 | About: Baidu, Inc. (BIDU)

Summary

Baidu is the Google of China and it may be a better growth story than the Google of America.

It is the market share leader for internet search in China, but its mobile strategy is what is driving growth.

And Baidu's new investments in artificial intelligence technologies suggests it intends to go head-to-head with Google in search and beyond.

While recent China internet hysteria has been focused on companies like Tencent's WeChat (OTCPK:TCEHY) messaging app and Alibaba's upcoming IPO in the U.S., Baidu surprised the market last week by posting strong 2Q results. Baidu's investment in mobile is paying off quicker than expected, with mobile advertising now accounting for 30% of its revenue. Baidu's revenue this quarter was up 59% from a year ago and net profits rose 34%.

Baidu (NASDAQ:BIDU), pronounced "by-doo" in English, is a Chinese internet search provider. It is the "Google" of China. The company was founded in 2000 and headquartered in Beijing. In 2007, Baidu became the first Chinese company to be included in the Nasdaq-100 (NASDAQ:QQQ) Index.

There is still huge potential for growth in the Chinese internet industry due to still low penetration levels of only 42%. In China, due to government regulation and other considerations such as knowledge of the language and local culture, Chinese companies dominate. Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is not a key player in China, shuttering search in 2010 due to censorship concerns.

Baidu has become the leading internet search provider in China. Its strong financial position and differentiated search and mobile offerings have positioned it for growth in online advertising. Baidu has been shifting its focus on extending its search dominance into mobile. Baidu currently has a 63% share of the search market, but lost share last year to its Chinese rival Qihoo (NYSE:QIHU).

Click to enlarge

Despite these market share losses in internet search, given its latest financial results investors can now take comfort in the fact that Baidu has the best smartphone strategy and is the default search engine on most mobile phones. Like Google in the U.S., Baidu has invested in mobile map and location technology and recently acquired a popular Android app store from NetDragon for $1.9 billion. Compared to Quihoo's search engine (so.com), Baidu's mobile search does not just give users links, but also gives local search features such as location mapping and direct dial functionality.

Baidu's aspirations do not stop at mobile dominance in China. The company announced last May that it would invest $300 million in a R&D center in Silicon Valley which will be headed by ex-Google exec Andrew Ng, a former head of Stanford University's s artificial intelligence lab. There are rumors that the center is developing a bike that could drive itself through packed city streets. And more recently, there has been talk of a self-driving car concept. These moves signify that Baidu is not only going after market share dominance in China, but is ready to go head-to-head with Google, in areas beyond search and mobile.

Baidu's recent results have renewed investor interest in the stock. The stock soared to new highs on the results. This is a stock I wrote about in my book, Best Stocks Now, back in 2011. At the time, I said that I liked Baidu, the "Google of China," better than the Google of America, because there was more upside potential. But let's take a look now.

Best Stocks Now Analysis

Baidu is a $79.4 billion large-cap technology stock that has once again become a Best Stock Now. After falling out of favor and trading flat last year, the stock is roaring back this year on its strong mobile results. The stock does not pay a dividend so it is not appropriate for Income accounts, but it is still an option for Conservative or Moderate Growth accounts given the size of the company.

Data from Best Stocks Now app

My 5-year target price on Baidu is $385 per share, so even after its move to $226 per share last week, there is still plenty of room for upside.

Data from Best Stocks Now app

Over the last 5 years Baidu stock has delivered an average annual return of 41.7% versus only 15.2% for the S&P 500 Index. Over the last 3 years, Baidu has underperformed and that is why I have not owned it over that time period. But Baidu has staged a huge come-back. Over the last 12 months, Baidu is up more than 80% and is up more than 27% year-to-date. The stock receives a Momentum Grade of A.

Data from Best Stocks Now app

Overall, the stock receives a grade of A- and is ranked #187 out of 3,800-plus stocks. The stock became a Best Stocks Now about 2 weeks ago. I do not currently have a position in Baidu but China is starting to look good in the current market.

Data from Best Stocks Now app

I did notice the technical breakout on the stock prior to its earnings results. I also like the stock back in January and was very tempted to buy it back then. And given the stock's recent results, I'm taking a look at the stock once again as a Best Stock Now.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in BIDU over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.