Last week, Oppenheimer & Co's Andy Yeung expressed concern that Chinese internet search giant Baidu (BIDU) faced challenges with mobile search. Yeung reiterated a "Perform" rating of the stock. His note followed Goldman Sachs' Catherine Leung's comments warning of a "cannibalization from mobile" now threatening Baidu. At the same time, she reiterated a "Neutral" rating of the stock and set a $135 price target.
The Goldman and Oppenheimer analysts pointed out that danger to Baidu is two-fold, stemming from both its diminished market share of mobile search traffic as compared to conventional search traffic, as well as from the inherent challenges facing monetization of mobile search itself - a notion that would seem especially significant for Baidu because mobile stands to become the dominant vehicle of online search within the decade.
Baidu's stock price has taken a tumble the last two months. It is now trading around $110, near its 52-week low of $100. The following chart shows Baidu's share price over the last year, as compared to the S&P 500:
(click to enlarge)
Source: Yahoo Finance.
Is Baidu In Trouble?
While mobile search inadequacy is a legitimate concern for Baidu, we view the analysts' perspective that Baidu's core business could be seriously threatened as a result to be based on an exaggerated distinction between mobile and traditional internet usage. We think the negative buzz presents an opportunity for investors.
As mobile technology evolves, people's online behavior via their mobile devices should become increasingly similar to their behavior via their conventional computers. This would eventually translate into the generation of mobile search revenue roughly in-line with conventional search revenue. While this is not the case currently, we view the convergence of mobile and conventional computing an inevitability and, therefore, revenue opportunities should correspondingly converge.
Additionally, logically, if a consumer prefers Baidu search on a MacBook, so too should that consumer prefer it on an iPhone. Certainly, the way in which a mobile device interfaces with the internet, the manner in which the operating system is packaged, and the interfacing of the particular search functionality with that OS can exert some pull on the particular search path taken by any individual consumer - and today's mobile devices seem to exert significant pull in the way they package their software - but ultimately consumer preferences have a powerful way of persevering. Future mobile devices utilizing HTML5, by effectively circumventing the need for gateway applications for online integration with mobile, should help create a level playing field in the mobile sphere and foster more conventional computing behavior among mobile users.
This critique of the mobile vs conventional computing dichotomy applies to many other online companies, as well. Google (GOOG), Facebook (FB), and even Microsoft (MSFT) via Bing are all challenged to monetize mobile search activity as fruitfully as they monetize conventional search. But this is a short-term problem - an instance in which consumer culture is just a step behind technology. Apple (AAPL) and Amazon (AMZN) via music, books, and applications have effectively shifted consumer culture profitably, but these are in closed ecosystems. As the ecosystem opens, and mobile technology continues to advance, conventional online activity will translate comparably to mobile both in traffic and revenue.
Bottom Line
Baidu is trading just above its 52-week low of $100, boasts an attractive (given its growth) forward P/E of 17.5, a high ROE, high net margins, and is still one of the best ways to achieve exposure to China's growing and increasingly wealthy internet population. We like its prospects ahead and view recent negativity surrounding mobile search as an opportunity to buy at a decent price.
Disclosure: I am long MSFT.
