Filed Under:
Often called the "Google (Nasdaq:GOOG) of China", Baidu (Nasdaq:BIDU) has indeed rewarded investors with exceptional growth for some time. While the Chinese internet market is far from mature, the question remains whether Baidu will look to become such a wide-ranging technology company. It is an interesting dilemma - stick and stay in a market that can still pay, or divert resources toward becoming a more well-rounded company.

TUTORIAL: 20 Investments To Know

Growth, Growth and More Growth
Baidu reported that second quarter revenue jumped 78%, beating estimates by about 5%. The number of paying clients rose 17% from last year (and 9% from the first quarter), while the revenue per client spiked up 52% (and 29% sequentially).

While Baidu did have some higher costs, the company was more than able to maintain its leverage. Traffic acquisition costs rose 45%, and bandwidth costs more than doubled, but gross margin nevertheless improved by more than a full point from last year. Likewise, operating margin expanded nicely (up about four points) as operating income rose 91%.

How Much Customer Growth is Up for Grabs?
The difference between client growth and revenue per client growth is an interesting one. Large brands in China are doing more search marketing, and Baidu seems to be leveraging its considerable market share to take advantage of that extra money floating around.

Still, it is interesting to see that client growth was below 20%. Baidu has been talking about marketing more to small and mid-sized businesses recently, and it would stand to reason that an awful lot of them are in China. So, what to make of the discrepancy? Is Baidu seeing rivals like Tencent (OTCBB:TCEHY), Sohu (Nasdaq:SOHU) or Netease (Nasdaq:NTES) sign up more clients by offering better terms? Is it a case of there only being so many businesses that have the scale where a bigger online presence makes sense? Either way, this is a metric worth watching.

New Opportunities to Spread the Brand
While Baidu is not yet Google-like in its breadth of business and service offerings, Baidu is not just sitting still and focusing on paid search. Online video (QiYi) and music are becoming more and more significant as markets, and Baidu is also launching its own browser in a market where incumbent Microsoft (Nasdaq:MSFT) holds almost two-thirds share.

Other deals, like the recent acquisition of Qunar for $306 million, expand the company's e-commerce options. E-commerce has not quite taken off (at least not as well as the company's other platforms), and Qunar will face competition from the likes of Ctrip (Nasdaq:CTRP) and eLong (Nasdaq:LONG), which is controlled by Expedia (Nasdaq:EXPE). Still, it's a worthwhile endeavor.

The Bottom Line
On one hand, it is tempting to say that Baidu has maxed out its market share, and it is now vulnerable to competitive takeaways from rivals like the aforementioned Tencent - not unlike the trouble Cisco (Nasdaq:CSCO) has seen or that Yahoo! (Nasdaq:YHOO) saw. On the other hand, Google itself has shown that market dominance is not necessarily followed by inexorable deterioration. What that tells me is that Baidu needs to be on guard to competitive threats (including the off chance that Google may try again to compete in China), but plenty of opportunity remains.

Baidu shares do not look especially cheap. Given that the shares have nearly doubled in the past year and basically sit at their 52-week high, that is not a major surprise. Growth investors will like this one, and the company seems poised to deliver more estimate-beating quarters that can fuel the momentum. Value investors know better than to expect to find high-growth internet names in their sweet spot, but this is a company that would seem to have a long runway in front of it. (For additional reading, also see Top 6 Factors That Drive Investment In China.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center