Baidu: Regulatory Risk Growing?

| About: Baidu, Inc. (BIDU)
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Cyberspace Administration of China has increased its regulatory oversight on search engines, a negative to BIDU.

Increased regulatory uncertainties could further limit BIDU's revenue growth and increase compliance cost.

Prefer BABA over BIDU and lower regulatory risk.

The Chinese regulators has increased its oversight on China's search engines including Baidu (NASDAQ:BIDU) requiring the search engines to notify the regulators of banned content and increase the qualification standard of the advertisers in the wake of the death involving a 21-year-old college student seeking treatment that was advertised on BIDU's search results. (see - Baidu: Cutting Forecast On Weaker Outlook) The new rule will take effect on August 1st and all the search engines in the country will not be allowed to provide banned information via links, summaries, key words, related searches and recommendations. Additionally, the search engines are required to report illegal websites and apps that contain prohibited content.

In my view, this is another step that the regulators are taking to ensure the quality of China's internet space given that many ad platforms place profit over quality, and in some cases the consumers ultimately pay the price. This reinforces my cautious view on BIDU in that regulatory risk is something that investors cannot overlook. Although BIDU has historically had very good relationships with the regulators, I believe that honeymoon period between the Chinese regulators and BIDU is over in the wake of Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) departure from China in that the government no longer needs to support BIDU to compete against GOOG, and instead the government is increasingly focusing on improving the quality of the internet space to ensure stability amongst the public.

Given that almost all of China's internet users turn to BIDU for information, the integrity of the platform is necessary for a developed China, and more importantly, for a content middle class that would not challenge the stability of the communist party. That said, I remain cautious on BIDU.

While I believe that the company is certainly on the right path to expand beyond search, more needs to be done to ensure that its core business is stable. I reiterate my bullish view on Alibaba (NYSE:BABA) given the lower regulatory risk. Although I acknowledge that BABA faces the regulatory scrutiny of counterfeit goods that are sold on its Taobao and TMall platform, investors should note a key distinction that counterfeit goods are more harmless to consumer confidence (and their wallet) rather than to the consumers themselves. In other words, counterfeit goods (most of them at least) are not fatal, whereas falsely advertised medicine or medical treatment over BIDU is. If I were to pick between a fake iPhone or a potentially fatal medical procedure, I will pick the former.

Disclosure: I/we 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.