With a population contributing to 20% that of the world, the sheer numbers of the Chinese market is a big plus for any business operating in China that relies on the head count. Baidu (NASDAQ: BIDU) is one such company that has tapped into the power of numbers to emerge as one of the most obvious success stories as far as overseas technology stocks listed on the NASDAQ are concerned. Baidu recently reported 4th quarter profits of $3.535billion, it’s most successful quarterly result to date. For this 11 year old company with its business centered, as the figures suggest, on a very successful Internet Search model, this is surely the beginning of better things to come.
Baidu has a number of things really going for it. Firstly, most of its revenues are generated from within China. Secondly, Baidu has a controlling share in the internet search business in China, outsmarting other competitors such as Google (GOOG), Bing (MSFT) and Yahoo! (YHOO). The exit by Google from mainland China in 2010 left the market wide open for Baidu to dominate, propelled by the fact that Baidu is compliant with the Chinese government’s internet search censorship regime. Whilst Yahoo and Bing are considered competitors, neither have the penetration that Baidu have and both are reluctant to be seen as in cahoots with the regime. This regime has created a notable divide between the large Western companies who do not want to be seen as endorsing censored or manipulated search results back home. Baidu has gladly taken on this role, focusing its services on the Chinese market. As a popular search engine operating in the most populous country in the world it is presently and unsurprisingly ranked number 5 on Alexa’s most visited website rankings. Everything has been working in Baidu’s favor for domination of this hugely lucrative market.
So what is the way forward for Baidu in terms of its share price? Baidu’s stock has increased near to 45% in 3 months, and it is currently trading at around $145 a share. This is close to its previous all-time high of around $165. As such, we will likely see some short-term selling with traders taking profits, but this will quickly give way to a sustained bullish run and this is why I think this will be the case:
Less than 40% of China’s 1.5billion people are online. There is room for expansion and an increase in number of Chinese residents using Baidu as a search engine will lead to an increase in advertising revenue for Baidu. More money, more investor interest and higher share prices. This is perhaps the most basic driver of Baidu’s future success. The company is based on the catchphrase of simple and reliable which will be attractive to many new web users if we take the Google’s strategy into account. This also assumes that they maintain their position as the market leader in China but, with Google moving out of mainland China they have a very high chance of attracting a huge base of relatively new internet users.
A large section of the Chinese population is leaving the country to take control of Chinese economic interests in the Developing World. These migrants will take their customs and cultural norms with them, and will surely prefer to use Baidu (offered in Mandarin) over other search engine services. This number could be in the region of 400million people over the next few years. Although this will assume that Baidu will be able to out battle the large, Western search engines, if they can create enough impact in spreading their brand across emerging markets then they will build a solid growth model not only amongst the Chinese community. Having signed a large deal with Microsoft to bring their search facility in English the expansion potential of Baidu also becomes far more possible in non-mandarin speaking countries.
Apple (AAPL) is currently in talks with Baidu to make it the default search engine for all iPhones sold in China. Given the enormous popularity of the iPhone, this can only mean better business for both companies. The recent demand for Apple technology amongst the Chinese suggests that the brand is going to be incredibly popular in China. With the mobile internet market very much in its infancy in China, the increased revenues that Baidu can exploit from this will drive the share price of the company even higher. However, given their influence, if the talks with Apple break down and it decides to back any of Baidu’s major competitors in China it could quickly turn from friend to foe for Baidu.
There isn’t much difference between the advertising-based revenue model of Google and Baidu. Given that Baidu is operating in a market that is equal to several markets combined that Google operates in, we see very clearly that Baidu is very well positioned to generate profits in very much the same way that Google has done over the years. However, it is worth looking at the other industries that Baidu has moved in to including the online recruitment sector in China. Although ideally positioned to exploit the huge potential in China, Baidu faces competition from 51Job (NASDAQ:JOBS) in providing these services and failure to capitalize early on its web domination in China may cost them dearly.
Having said this, the outlook for Baidu is very positive indeed. The recommendation for this stock is a strong BUY once the market has experienced the profit-taking pullback which is being anticipated by some analysts. Despite this advice, with the company being compared to an early Google, and the pace that technology is being embraced in China, it will be far more beneficial to get involved in this stock at an early stage rather than late.