Baidu's Successful Search For Growth

By Greg Sushinsky | July 29, 2009 AAA

Chinese search engine Baidu (Nasdaq: BIDU) continues to grow, as its recent second-quarter earnings report shows. Despite the Chinese economy and stock market which faced a downturn for part of the last year, Baidu has come through this weak period in good shape. Let's look at the company, whose stock has been characteristically volatile and has seen big runs, to get a sense of its near-term and long-term prospects.

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Profits On The Rise
Baidu posted a 44.6% increase in net income for its second quarter, earning $56.1 million or $1.61 per diluted share, versus $38.6 million or $1.11 per diluted share in last year's second quarter. Revenue increased from $117 million to $161 million in the comparative period.

Continued strong margins and execution were cited by Robin Li, the company's CEO, as Baidu continues to increase its number of online customers. The company also provided an outlook for continued growth in the third quarter.

The Search Realm
Google (Nasdaq:GOOG), the internet search giant, has found it necessary to increase volume to battle recent declines in net advertising and by contrast, Google China has had flat advertising revenues where Baidu continues to grow. Admittedly, Baidu is many times smaller than Google and is mining the still largely untapped potential of its home-turf Chinese audience, but its business growth and its potential remain enormous.

Microsoft (Nasdaq:MSFT), has seen recent difficulties with its falling revenues, but its new Bing search is making some inroads into Yahoo (Nasdaq:YHOO). Microsoft has announced its desire to get deeper into the search area of the internet, and this appetite may still include an eventual deal with Yahoo. Yahoo, though it has experienced some slumping in its display ad revenues, remains a strong, viable internet company still bringing in lots of cash and thus is considered an attractive potential partner.

China Growth
While all these tech-internet giants are strong companies, they are not experiencing the type of growth evident, nor the potential growth available, in China. China's Net Ease (Nasdaq:NTES), an internet stock which features online gaming, is mining a lucrative niche market while Baidu's search competitor Sohu (Nasdaq:SOHU) has split its online gaming segment off into Changyou (Nasdaq:CYOU) to hone in on this same lucrative niche.

Baidu, Sohu and NetEase reflect the still-robust nature of China's potential for economic growth, despite the drop its economy experienced in the global recession. China's government stimulus has apparently boosted business already in the developing land so this, along with slowly improving global economic conditions, has been the tonic for Chinese business.

Baidu's Own Growth
The first thing to note about Baidu's stock is that it has seen a run up from $100 a share to $358 in the last 52 weeks, so you should factor this into any potential purchases. As for the business growing, Baidu's expected long-term growth is over 30% annually.

While some find the stock too volatile and question whether it can continually innovate to keep zipping along at this pace, the other side of the argument is that Baidu, along with the other Chinese internet companies, still find themselves in a largely untapped field from which to harvest future growth.

The company is not merely depending on favorable demographics to keep it growing, however, as it adds services and keeps developing its business, with its Phoenix Nest premium search just one such factor.

Baidu stock is volatile, it's true, so keep an eye on potential entry points if you're interested in buying it. Also stay alert to the Chinese and global economy, but with some bumps along the way, Baidu can be not just a search engine for users but a growth engine for investors for the long term. (For additional reading, check out Top 6 Factors That Drive Investment In China and Investing In China.)

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