Baidu (BIDU), the leading Chinese internet search provider, presently dominates with a market share of well over 78% of the total internet services market, thanks to Google's exit in 2010. I find it witty and quite fitting that Baidu's name literally means "hundreds of times" and originates from a poem written more than 800 years ago. The poem's author tells of searching over and over for his dream in the midst of life's obstacles.
Baidu's products and services consist of search products, social networking products, as well as user-generated, content-based knowledge products and a range of other internet-related products. The internet user base in China has grown by 12% to exceed the 500 million mark. This growth has resulted in an increase in e-commerce, social networking, and gaming activities.
This being the case, one cannot ignore the growth opportunities and revenue generation potential for a company that relies on online marketing for its income. Baidu's main source of revenue is generated from the provision of performance-based, targeted marketing solutions to customers. With an economy as dynamic and large as China's, this company is definitely well positioned financially. Baidu enjoys a key advantage in the form of a monopoly, boasting an approximate 488,000 active online marketing customers.
Baidu's share price dipped 2% to close at an average of $135 on April 24, 2012, having hit a high of slightly under $140. It peaked at $165 over the last year and continues to be an investor favorite, trading at an average of 5 million shares daily. Baidu reported a net income of $326 million, or close to $1 per share, for the fourth quarter. This marked an almost 83% increase from the previous year.
Baidu is known to make policies geared towards stockholders' interest, such as the stock split back in 2010, which led to over an 8% increase in the stock price in a single day. These are some of the strategies that have reinforced consumer confidence and, consequently, created a greater demand for the stock. This demand should grow in the future as analysts stick to the "buy" rating for this stock. Baidu is expected to maintain strong revenues as large consumers are encouraged to shift their advertisement expenditure from offline media to online search engines.
Rumor has it that secret talks are going on at the moment between Baidu and Foxconn Technology (HHPD). Foxconn manufactures gadgets for leading industry players such as Apple, HP, and Best Buy. If the rumors are confirmed, then it is safe to assume that Baidu may be gearing up to tag Foxconn to manufacture a smartphone for its android-based Baidu Yi platform. The smartphone will target low and middle income classes, as its price is set to be well below the prevailing market price range for smartphones.
The main objective is to tap into the lower-income earning market, which remains virtually unexploited due to the prohibitive costs of smartphones. With the ever-increasing demand for cloud integration for sharing, storage, and backup, this partnership will prove a goldmine for Baidu in the event that it goes through. What does this mean for investors? With Baidu's current trend, if all factors remain constant, it is safe to say that this stock will remain on demand for a while to come. Let's have a look at some of Baidu's main competitors.
21Vianet Group (VNET) is a leading data center services provider in the People's Republic of China. 21Vianet's list of products and services includes hosting and related services, managed network services, and cloud computing infrastructure services. 21Vianet's price has dipped recently by almost 4% to close at slightly above $11 after hitting a high of around $12. The fourth quarter saw record net revenue of around $50 million, marking an increase of 61%. Net revenues increased by 94% to even out at around $162 million. Judging from this performance, investors have something to look forward to. 21Vianet is relatively stable in contrast to Baidu; therefore, I would not hesitate to buy.
Sohu (SOHU), in English, "Search-fox", also offers a challenge to Baidu. The company provides search, gaming, community, online media, and mobile services in China. It hosts content for various topics including news, business and finance, information technology, entertainment, and sports, as well as online video content and live television webcasts. Sohu's stock is trading around $47 per share, with a current market cap of around $1.8 billion. It announced its financial results for the year 2011, recording revenue of $852.09 million, 42.20% higher than in 2010. The average analyst recommendation for the stock is hold, but many analysts suggest buying.
SINA (SINA), another worthy competitor in China, is engaged in a wide range of internet-related services. The company features a popular Twitter-like micro blogging platform, Weibo, a proprietary search technology, free email and instant messaging tools, as well as an online shopping website. Its SINA game platform offers a variety of online games. SINA's stock is trading around $55 per share with a current market cap of around $3.7 billion. Although the revenue of the company decreased last year due to the fact that it failed to implement the real name policy on Weibo issued by the Chinese government, SINA has good opportunities to monetize its popular community and gaming platforms in 2012. With a price of around $55, the shares are considered cheap, so a moderate buy is recommended.
Popular internet portals in China have another strong rival, Renren (RENN), which operates an e-commerce website, a social networking platform, an online games center, a video sharing website, blogging, and messaging services. It also provides several advertising solutions and sponsored online events. Renren's stock is trading around $6 per share with a current market cap of around $4.4 billion. The average analyst recommendation for the stock is hold, but some suggest selling it. The company's price/earnings ratio is relatively high compared to industry average, and the financial report for the fourth quarter of 2011 shows 57% increase in comparison to the corresponding period in the previous year.
Getting back to our focus, Baidu, we can regard it as a top Chinese internet search provider and a major player in many other popular online services. While currently cheap, its stock has the potential for large growth. Therefore, I see no reason not to be bullish on this one. My advice is to buy it before it becomes too expensive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.