Baidu's Product Focus And Strong Fundamentals Make It A Smart Investment

| About: Baidu, Inc. (BIDU)
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Baidu's mobile business is growing at a fast pace, and driven by new product innovations, it should continue getting better.

Baidu's features such as click to action and city-level bidding will attract more advertisers to its platform, while products such as Baidu Maps and self-driving cars can be tailwinds.

Baidu's fundamentals are strong, making it an intriguing investment despite trading at 52-week highs.

The Chinese Internet industry is tracking ahead at a robust pace, and Baidu (NASDAQ:BIDU) is making the most of it. Baidu commands the lion's share of the search market in the country. In fact, Baidu has 70% of the Chinese search market under its fold. As a result, it is no surprise why its stock has appreciated 23% in 2014.

Baidu's second quarter numbers were also strong, primarily due to strength in the mobile business. Management is optimistic about the company's performance, especially in the mobile segment, and expects the situation to improve further going forward. According to Baidu chairman Robin Li, "We had a great quarter as we continued to build very strong mobile momentum."

There can be no denying this fact, as Baidu's revenue for the quarter increased 58.5% year-over-year to $1.93 billion. Its net income also rose 34.1% to $571.7 million. Going forward, management expects its third quarter revenue to be in the range of $2.16 billion to $2.22 billion, which will translate into a 53% year-over-year rise. Moreover, Baidu's mobile revenue is increasing at an impressive pace, as during the previous quarter, revenue from mobile services reached 30% of total revenue. This signifies its growing strength in its mobile business.

Looking ahead, the company's performance should improve due to its strategies as we would see shortly, while strong fundamentals also make Baidu an interesting pick.

Enhancing the user experience

Baidu crossed more than 500 million monthly active users during the second quarter for its mobile search service. As a result of this tremendous response, management is aggressively investing in this area with a key focus to improve the user experience. Hence, the company has partnered with various companies in different sectors such as healthcare, e-commerce and automotive, among others.

For instance, in the automotive sector, it has joined hands with Bitauto and Autohome to display customized auto content. Baidu also enhanced its search response time for PCs, which is now ten times faster compared to what it was in the beginning of the year. These modifications will attract more users and ultimately fuel its growth.

Baidu has also upgraded its mobile app for web browsing, with personalized features and richer content. Its new app is comparatively light, and its best feature is that it integrates all the Baidu products, such as Mobile Maps, Baidu Search, Baidu Wallet, and the Nuomi group buying service. For instance, an individual can search a theater, check the availability of seats, and then immediately book it using Baidu Wallet. With services like these, Baidu is making the right moves to expand its presence in mobile.

Attracting marketers with enhancements

The internet search engine giant's improvements will ultimately prove beneficial for online marketers which will be able to capture leads on a large scale and generate impressive returns on their investments. Now, Baidu offers a wide range of advertisement formats like the click to action mobile ad format that includes click to- call, click-to-chat and click-to-download. These options have high conversion rates that will benefit marketers, increasing Baidu's revenue in turn.

In addition, Baidu's investment in R&D has enabled it to roll out new products and initiatives. The company launched a personalized click-through rate prediction initiative on both PC and mobile search that will make search ads more relevant for users. It has already received a good response from individuals using the system. Its city level bidding was another initiative launched during the quarter that will now allow advertisers to bid at a city level rather than the provincial level.

It is receiving positive response for this new initiative, as many of its customers have opted to participate in city level bidding. This is not surprising, as advertisers will now be able to target a more selected audience that meets their requirements, thereby improving their return on investment.

Ancillary products gaining momentum

Baidu's mobile maps application is also gaining traction among users. In fact, during the second quarter, its active user base crossed the 200 million mark, reflecting the popularity of the app. Moreover, the company claims to be the only mobile map in China with turn-by-turn voice navigation for walking. It has also incorporated more real-time road and parking updates that will further enhance its user experience.

In a step toward technological innovation and giving tough competition to Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Baidu also is developing its own self-driving car. Baidu's product will be different from Google's no wheel design, which it considers to be wrong.

According to Baidu's Institute of Deep Learning's deputy director, Kai Yu, "A car should not totally replace the driver but should really give the driver freedom. Freedom means the car is intelligent enough to operate by itself, like a horse, and make decisions under different road situations." Although this product is still in the developmental phase, from a long term perspective, this seems to be a good initiative as Baidu is trying to be more future proof.

Fundamental analysis

Baidu might look expensive at a trailing P/E of 43.24, which is higher compared to the industry P/E of 30.41. But its forward P/E looks attractive at 4.3, reflecting a significant improvement in earnings. At the same time, Baidu has a strong balance sheet. Its cash position is strong at almost $8 billion, while the debt is lower at almost $4 billion. The company's current ratio is also strong at 3.96, indicating strong liquidity.

Baidu also has strong margins, along with an impressive return on equity. Its profit margin stands at a strong 30%, while the return on equity is also a robust 29%. As such, even though Baidu is trading near its 52-week highs, it doesn't look like a bad bet at these levels. The company is doing the right thing by investing in product development, and it has good fundamentals as well. As such, Baidu is a stock that investors should consider holding for the long run.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.