3 Key Drivers To Baidu's Stock Value

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 |  About: Baidu, Inc. (BIDU), Includes: GOOG, MSFT, YHOO
by: Trefis

We recently initiated coverage on Baidu (NASDAQ:BIDU) with a $134 Trefis price estimate, which is largely in line with our current market price. We estimate that Baidu has nearly 80% market share in the rapidly growing Internet search market in China where the company faces modest competition from foreign competitors like Google (NASDAQ:GOOG) which was formally barred from China, Yahoo (NASDAQ:YHOO) and Microsoft’s (NASDAQ:MSFT) Bing. You can see our launch article titled Baidu New Coverage: $134 Trefis Price Estimate.

Below we highlight the three most important drivers of Baidu’s value.

(Chart created by using Trefis' app)

1) Baidu’s Revenue per Search

Baidu’s Revenue per search represents the average advertising revenue generated by Baidu for every 1,000 searches conducted on Baidu.com. Revenue per search is primarily a function of the click through rate on ads placed alongside search results, as well as the price paid by advertisers for every user click, known as cost per click. Baidu’s revenue per search has increased from $3.0 per 1,000 searches in 2006 to $3.8 per 1,000 searches in 2010.

We expect the growth in Baidu’s revenue per search to continue to increase. As the leading search portal in China, Baidu will benefit from a long-term shift of ad dollars towards online advertising. In addition, as China’s economy continues rapid growth, we expect the Baidu’s revenue per search to converge with the higher rates earned by players like Google outside of China.

See driver analysis

(Chart created by using Trefis' app)

2) Baidu’s Search Market Share

Baidu’s search market share in China has increased from 56% in 2007 to 71% in 2010. The company has benefited from Google’s decision to exit China. That decision has not completely eliminated the traffic from China to Google, but it has helped Baidu to gain share primarily at the expense of Google.

We believe that Baidu will continue to gain some additional share at the expense of global search players like Google, Yahoo and Microsoft.

See driver analysis

(Chart created by using Trefis' app)

3) Searches per Internet User in China

The average number of searches per Internet user multiplied by the number of Internet users in China determines the total search query volume in China. Baidu’s high market share means that the company is the recipient of the bulk of these queries and more queries translates to higher Baidu search revenues.

Searches per Internet user in China declined from around 54 per month in 2006 to 50 per month in 2009 due to a rapid increase in the number of Chinese Internet users. However, it increased in 2010 to 61 per month, and we expect it to continue to increase.

We believe that searches per Internet user in China will continue to increase as broadband penetration increases and mobile searches are increasingly common. As of July 2010, Internet penetration levels in China stand at around 32% while the broadband penetration levels within internet usage is in excess of 98%. [1] There are more than 900 million mobile phone users in China and the penetration of smart phone owners, though at only around 10%, is growing. [2]

See driver analysis

See the full Trefis analysis for Baidu.

Notes:

  1. Internet and Broadband penetration in China, China Internet World Stats, July 2010
  2. Mobile phone users and smart phone penetration in China, Wireless Intelligence, July 2011

Disclosure: No position