After Baidu's (BIDU) second quarter earnings increased and beat analyst estimates, it will be difficult to conclude what Baidu's earnings will look like next quarter. Using web metrics, mobile phone data, and trends, Baidu will be analyzed and compared to determine their outlook for the third quarter.
Page Views/ User
Page views per User determines how much content each user views while on the site. The change in Page Views per User over a three month basis is below.
Over the last three months, Baidu's Page views per User has dropped 7.2%. This drop means more users are leaving after viewing less page content either from clicking on an ad or finding their relevant, organic search content faster. A drop in Page views per User could mean people need to search through less content to find what they need. If this means Pay per Click, PPC, and Cost per Impression, CPM, advertising meathods are more effective by getting relevant content to users faster, then Baidu could see earnings growth in the third quarter. On the other hand, if users are clicking on more organic content or are leaving the search engine to use competition such as sina.com.cn (SINA) or sohu.com (SOHU), the decrease in Page views per User could be a trend that will negatively impact the next quarter earnings.
Baidu's earnings this quarter showed this was not the case. Based on the popularity of Baidu and quality of their services in comparison to their competition, Baidu is likely gaining users from its competition, not loosing them. This increase in users leaving competition and going to Baidu, will give them more advertising revenues, especially as they continue to improve their ad formats.
Mobile Phone Users
After Baidu released its cloud based phone wireless phone carrier China Mobile (CHL) and announced to sell another, less expensive, smartphone running on Google's (GOOG) android, analysts forecast that Baidu's mobile advertising and phone sales will rapidly grow again in the third quarter. According to a report by the China Internet Network Information Center, as of the end of June, there were over 538 million internet users in China, up 5% over the six months prior to that date. During that same time frame, mobile users grew to 388 million users, up 9% from 356 million. Overall, China's internet user base has grown primarily from an increase in smartphone internet users.
For Baidu, this growth in mobile phone users is key. Baidu will be selling their own, low priced, Android smartphone. This Android smartphone will give Baidu a much larger chunk of China's mobile phone market, benefiting them with more internet users and smartphone sales. Having more smartphones on the internet allows Baidu to enlarge their mobile CPM advertising market, giving Baidu another field to greaten earnings and revenues. Baidu handles 78.6% of all searches in China, so even with many other smartphone competitors, like Apple's (AAPL) IPhone, on the market, Baidu is bound to receive in the area of 78.6% of those smartphone internet searches as well.
Censorship of Google in China
The censorship of Google in China makes it an unpopular choice in comparison to Baidu. Within China, all of Google's internationally popular services are either slow or non-existent. Google's disadvantages in China have led Baidu to prosper. Baidu offers its fast search engine and a menu bar of services. Google China, on the other hand, only offers its slow, censored search engine. Because of this, most searches conducted using Google in China are not from google.cn (Google China). Instead, Google internet users in China tend to use google.hk (Hong Kong) or google.com. In fact, the use of Google from Hong Kong instead of China is so prominent that, in China, google.hk is the 5th most popular, while google.cn is 26th. The use of Google's international web in China has caused Google to account for 16.7% of China's searches. Even with a somewhat large user base in China, Google comes way behind Baidu, in second place.
Globally Dominate Google
Worldwide, Google by far is the largest search engine. As of July 22, 2012, this year Google had a worldwide search engine market share of about 82%.
Tied for the second largest with Yahoo, Baidu's services are the best in China, but barely compete with services internationally. Google outside of China offers such an extraordinary amount of free services, that it's very difficult to compete with. Google's products and services range from email, cloud services, and a social network to smartphone hardware and operating systems. To make it even harder to compete with, Google interconnects all its services, causing a super user friendly environment. One Google account gives you more of a variety of services than Baidu outside of China. It'll be very difficult for Baidu to enter the worldwide search engine market effectively. Baidu will more than likely concentrate on growing within China's massive economy.
Baidu's worldwide reach has grown 5.7% over the last three months. Baidu's worldwide daily reach percentage has grown primarily from growth of internet users in China. Baidu only has a strong internet presence in six countries globally.
Baidu likely will continue to expand as China's mobile internet users increase. This increase in size is foreseen to continue through the third quarter. When China's mobile internet user growth begins to plateau, Baidu's expansion is expected to even out. As of now, Baidu has little to compete with Google internationally, but is expected to have further growth prospects in China's giant economy. This quarter, Baidu's smartphone sales and internet user growth could justify another increase in earnings for the third quarter.
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Additional disclosure: I have not received compensation directly or indirectly for expressing any recommendation in this report. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.