Touted as the Google of China, Baidu (NASDAQ:BIDU) is the leading search engine in China with more than 70% market share. Baidu is the number one Chinese language search provider as well as the most trafficked website in China. Its main search operation provides search for websites, audio files, and images. Baidu’s platform also includes Baidu Union, a network of third-party websites and software applications. The company competes with global search engines like Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO) and Microsoft’s (NASDAQ:MSFT) Bing. Notably, Bing and Baidu recently struck a deal whereby Bing provides the English search results for Baidu.
We’re launching coverage of Baidu with a $134 Trefis price estimate, which is roughly in line with the current market price.
Baidu at a Glance
The three main sources of value for Baidu are:
1. Search Advertising (87% of value)
2. Search and Content Partnerships (8% of value)
3. Display Advertising (2% of value)
Search advertising accounts for the bulk of Baidu’s value because the company is the leading search engine in the large and fast growing Internet market in China.
We estimate that Baidu currently has nearly 80% share in a market that has about 530 million Internet users that conduct an average of 70+ search queries per month. That implies nearly 360 billion search queries will be conducted on Baidu in 2011, and we estimate that Baidu will generate about $4.70 for every 1,000 search queries implying about $1.7 billion in 2011 search advertising revenues for the company.
(Chart created using Trefis' app)
Large Growth Opportunity
While there are risks that Baidu may experience more search competition in the future, there are tremendous growth opportunities as (i) Baidu’s revenue per search increases and converges with those of global players like Google (ii) the Internet market in China continues to grow rapidly as another 300+ million people come online over the 6-7 years.
Upside Scenarios to Baidu
1) Baidu Revenue per Search: Baidu revenue per search (RPS) increased from $3 per 1,000 searches in 2006 to around $3.80 per 1,000 searches in 2010, and we expect it to continue to increase to around $8 per 1,000 searches by the end of Trefis forecast period.
Baidu’s continuing dominance of China’s Internet search market and the on-going shift in ad spending online are some of the favorable factors for Baidu. These factors could help Baidu command high ad pricing from advertisers. If Baidu can increase RPS levels to around $10 by the end of Trefis forecast period, there could be an upside of more than 25% to the Trefis price estimate.
2) Searches per Internet User in China: We currently forecast searches per Internet user in China to increase from around 61 per month in 2010 to around 114 per month by the end of Trefis forecast period. If this parameter increases to 140 per month by the end of Trefis forecast period, there could be an upside of 25% to the Trefis price estimate.
In these two scenarios, you can see up to around 50% upside to our price estimate. You can come up with your own scenarios by using our modifiable charts.
Disclosure: No positions
