Why Investors Should Add Baidu To Their Portfolios

| About: Baidu, Inc. (BIDU)
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Baidu (NASDAQ: BIDU) share prices recently breached the $100 mark, spiking to as high as a $103 closing price. What does this mean for investors who want to add the stock to their portfolio? Is it a buy or should they hold on to their money?

Baidu's Strong First-Quarter Results

Baidu is the Chinese equivalent of Google, an Internet search engine that provides local web surfers an easy and convenient way to find the information that they need. The tech company is also striving to monetize the site by placing targeted ads on its results pages based on the searches a particular user is conducting, similar to the Google AdWords model.

Baidu currently holds the bulk of market share in the Chinese Internet search market at nearly 79% and it expects to hold that figure steady and even grow it further in the face of competition from upstarts such as Qihoo 360 (NYSE: QIHU), which currently has a 15% market share. According to data from the analytics company CNZZ. Baidu was able to achieve this dominant position following the blocking of Google allegedly by the government, which prompted the search engine to pull out of the mainland and move to Hong Kong.

In its first-quarter earnings report, which it released in April, Baidu's revenues increased by 40% to $961 million during the quarter ended March 31, while operating profit grew by nearly 6% to $356 million. Net income attributable to Baidu also increased to $329 million, which brought diluted earnings per share to $0.95. However, analysts considered these results slightly disappointing since they failed to meet expectations that earnings per share would reach $1.03. In its guidance for the second quarter 2013, Baidu said that it estimated total revenues would reach from $1.187 billion to $1.216 billion.

Meanwhile, the company also reported that it had cash and cash equivalents (including short-term investments) of $5.445 billion, while net operating cash inflow reached $352 million. Expenses for research and development, meanwhile, grew to $130.5 million or an increase of nearly 83% from 2012, mainly due to additional research and development personnel. Increased spending in R&D was intended to help Baidu transition to the mobile search market, where it currently has a market share of 37.5 percent. Content and bandwidth costs as a share of total revenues both recorded increases, with content costs accounting for 1.6% of the total compared with 0.7% in 2012, while bandwidth increased to 6.8% from 5.3 percent.

Why Are Shareholders Rewarding Baidu?

Although share prices fell following the release of the earnings report, from $92.34 on April 25, to $85 the following day, they have been steadily appreciating since then. Currently, the stock is trading at $94.55. However, it recently spiked at the $103 level before falling down to below $100 again. What caused this spike? There are several reasons why shareholders may be rewarding Baidu stock:

Despite stiff competition from Qihoo, Baidu will retain its market dominance. Baidu's ace in the hole is its deal with Apple to include support for Baidu search engine on its iPhones and other iOS-powered mobile devices. Although the iPhone is still in second place behind Android phones, it is steadily gaining market share in China, particularly in the urban areas where the majority of affluent Chinese live. And there is still plenty of room for Baidu to expand its market share. As of 2012, China has an estimated Internet user base of 513 million, the largest in the world, and this is seen to grow further to 750 million by 2015. Chinese Internet users are seen to spend an average of 20 hours online per week.

Baidu is diversifying its business. The tech giant is currently launching new services such as iQiyi, an online video streaming site, an online payments solution BaiduPay and job recruitment site Baijob. In addition, Baidu has recently acquired the online video streaming site PPS for $370 million, and plans to merge it with iQiyi to create what it dubs the "largest online video platform" in China, which would provide subscribers not only with a wide selection of local content, but also content from overseas providers, such as U.S. TV shows, as well.

Baidu has actually been consistently increasing its revenues over the past five years. Looking at the four quarters of 2012 alone, the average growth rate is 57 percent. This means that the Chinese tech company has actually been recording higher revenue growth than Google.

Strong leadership. Baidu CEO Robin Li topped Forbes China's list of the country's top CEOs, which should not be surprising since he has successfully guided the company from strength to strength. Aside from its dominance as China's biggest search engine, Baidu is also second to Google as the world's largest independent search engine. The tech giant is also the first Chinese company to be listed in the NASDAQ-100 Index.

The Bottom Line

Those investors who have written off Baidu must right now be reconsidering their position, given that the tech company just goes from strength to strength and is even able to fend off competitors. Its success is demonstrated by its consistently high revenue growth. And Baidu's shareholders are showing their confidence in the company by bidding up its share price.

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.