Browser Wars: Will Qihoo Damage Baidu Stock?

| About: Baidu, Inc. (BIDU)

Baidu (NASDAQ:BIDU) is one Internet stock which is well-known to global investors but is a little bit under the radar when it comes to retail investors. The leading provider of Chinese language Internet searches reported surprisingly good results for the second quarter. Total revenues of $850 million rose by almost 60% from the same quarter of the previous year. Online marketing revenues were also up by almost 60% at $858 million on a year-on-year basis, and active online marketing customers, at 352,000, were up 18% from the same quarter in the previous year and up just under 10% from the preceding quarter. Revenue per online marketing customer, at $2,440, increased almost 35% from the comparable quarter of the previous year, and over 16% from the preceding quarter.

Traffic acquisition costs were $71 million, worth 8.3% as a percentage of revenues, compared to 7.9% in the previous year and 7.8% in the preceding quarter. Operating profit at $43 million increased more than 50% from the previous year. Net income attributable to Baidu was up by almost 70% over the same quarter in the previous year at $436 million. Basic and diluted earnings per ADS were $1.24 and $1.24, respectively.

Baidu was the first Chinese company to be listed on the NASDAQ-100 and has kept investors happy ever since. We have seen an impressive and continuous stream of innovation. For instance the company has recently launched its own low-cost smart phone and the latest launch is the Baidu Explorer which is a mobile browser for Android smart phones. Given the problems that Google (NASDAQ:GOOG) has in China and Baidu's own dominant position in the Chinese language search market, the new browser should produce a substantial revenue stream. Significant investments have also been made in cloud computing in preparation for the future. The browser represents the company's first foray into the relatively new area of mobile browsing and is claimed to be 20% faster than its competitors. It comes with a built-in Baidu search engine much along the lines of Google and its Chrome. It is not hard to see that the browser could be a big hit as most Chinese browse the Internet on their mobile phones instead of PCs. Moreover we should keep in mind that Google's strategy with Chrome enabled it to knock Microsoft's (OTCQB:MFST) Internet Explorer from the top of the heap.

Baidu has recently faced intense competition from the other Chinese search engine, Qihoo (NYSE:QIHU), and the new browser could be a real game changer. The emergence of Qihoo could threaten the dominance of Baidu in the Chinese search market because it already has its own search engine. The integration of the browser and the search engine should keep the company ahead. In addition to the browser, the company has announced that it will build a billion-dollar cloud computing facility focused on mobiles and providing access to cloud storage as well as cloud-based software. The cloud storage, which is called WangPan, is already operational and offers 15 GB of free storage to its customers which are huge when you consider the offer from competing American cloud computing companies. There are not many details about the facility but the fact that Baidu has spent $1.6 billion on the facility should speak for itself. The company plans to expand outside China and is already closed a deal with an Egyptian telecom company. It is also eyeing Southeast Asia and South America for the future.

According to a report by the China Internet Network Information Center, the number of Chinese mobile internet users overtook desktop internet users as of June 2012 and, in the future, mobile search growth will inevitably increase given the availability of low-cost smart phones. Baidu has a market share of over 80% in PC searches but only about 35% in the mobile search market where it is closely followed by Tencent Holdings Ltd (OTCPK:TCTZF) at 23% and Easou (22%). Baidu has been relatively slow in addressing the mobile market and has been weak in client end products. In contrast, both its competitors, QIHOO 360 Technology and (NASDAQ:SOHU) introduced free browsers because they understood the importance of building up a user base for mobile searches. It is now pushing pre-installation of its search engines on mobile devices and according to the company; its search function is now operational on 80% of the Android phones in China.

Qihoo launched its own search engine in mid-August but the data on the company's search and traffic shares have shown mixed results. Overall share of search declined slightly in August while Baidu rebounded a little. Share of traffic also declined slightly possibly because of decreasing adoption and users choosing Baidu as their search engine on their Qihoo browsers. I believe it is unlikely that Baidu will be seriously impacted because of its strong brand equity with users in China and the search technology that delivers a superior experience to the user. You must not forget that the user may be using a Qihoo browser but may choose Baidu as the default search engine. The superior search technology and broader range of product offerings such as maps, travel and online video enable users to get comprehensive search results. I also believe that superior search technology will ultimately count with the user.

This is an Internet company that has delivered solid results and, it may have stumbled occasionally, but has now made the right moves to consolidate its market position in one of the fastest growing markets in the world for the Internet. If you are looking for exposure to Internet stocks and are looking for a financially sound growth stock, I have no hesitation in recommending Baidu.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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