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Baidu (BIDU) CEO Robin Li stated last week that the company was struggling to monetize its mobile offerings in the Chinese market. While at first this seemed like ominous news for Baidu, we aren’t really alarmed yet. We think the company should focus on its mobile strategy for the long term and should continue to invest in mobile offerings by pouring vast amounts (currently 25%) of its R&D expenses into mobile. We expect Baidu’s progress on the mobile front will pay dividends as Chinese mobile Internet users and mobile ad spending grow over the next 4-5 years.

Baidu Can Capitalize On Mobile Internet Growth

Currently, only 40% of the Chinese population accesses Internet through mobile phones and only 150 million of over 1 billion Chinese citizens have 3G connections. Going forward, we expect to see an increase in the proportion of the number of mobile to PC web page views (which in Asia grew to 20% in 2011 from 8% in 2010), and an increase in 3G and mobile web penetration.

Both of these trends present Baidu with a lucrative opportunity to drive new user growth. This is why we think that mobile investment is a necessity for Baidu’s long-term well-being. Even if Baidu attracts new users to its mobile platforms based on its brand name alone, it will need to provide a solid mobile platform that meaningfully engages users to keep them involved.

Smartphone Ad Spending to Grow

We think that low mobile ad spending in China is a major reason why Baidu has been struggling to monetize its mobile visitors. According to research firm eMarketer, Chinese mobile ad spending was only $100 million in 2011, during which the total world ad spending was around $2 billion. However, the firm forecasts that mobile ad spending in China will increase seven-fold by 2016 to approximately $780 million.

If eMarketer’s forecasts materialize, we will likely see an upside to our current price estimate for Baidu. For example, if an increase in overall mobile ad spending in the Chinese market lifts the average revenue per search (RPS) to approximately $9 per 1,000 impressions on Baidu’s search platforms, we would see a near 10% upside.

We currently have a $123 price estimate for Baidu, which is approximately 10% above the current market price.

Notes:

  1. Baidu CEO Li Says Mobile Web Revenue Remains Elusive in China, Bloomberg
  2. China passes 1 billion mobile subscribers, passes 400 million mobile Web users and overtakes US as world’s top smartphone market, mobiThinking
  3. US on Track to Become Top Mobile Ad Market, eMarketer

Disclosure: No positions.

Source: Baidu's Long-Term Prospects Sound Despite Its Mobile Monetization Woes