Baidu (
BIDU
) is set to announce its Q4 earnings on Monday, February 4. It had
a pretty good fourth quarter as total revenues increased to
$995 million, growing almost 50% year-over-year. It also reported a
50% year-over-year increase in operating profit to $525
million.
Baidu's stock has been quite volatile during the fourth quarter,
falling from $110 in early November to $90 in early December and
rising again to $110 as of last Thursday. The volatility in the
stock is a result of uncertainty surrounding its future. Questions
remain around the company's mobile monetization strategy and rising
competition, which have made investors doubtful about Baidu's
business value. We will closely watch for any clarification
regarding these elements as they will be key to Baidu's future
growth.
See our complete analysis of Baidu here
Mobile Monetization
As of early 2012, Baidu had approximately 35% market share in
the Chinese mobile search market, substantially lower than its 80%
share in PCs and desktops. This is troubling because as more users
access the Internet via mobile devices, traffic growth to Baidu
sites is likely to slow down. Nevertheless, Baidu has launched its
own browser and OS to gain market share among mobile users. We,
however, expect mobile monetization to remain low and would like to
see a strategy for a solid product line that can leverage any
increase in Chinese mobile ad spending going forward.
Search Engine Market Share
Over the last three years, Baidu has posted strong growth in
EBITDA margins (from 45% in 2009 to 60% in 2011). This increase was
helped in part by Google's troubles in the Chinese market,
culminating in the firm's exit in 2011. Google's exit essentially
strengthened Baidu's dominance in the Chinese search market though
it could wane as new competitors enter the industry.
A major threat to Baidu's dominance is new search engine Qihoo
which was launched in August 2012 and was almost an instant hit
among users. If Qihoo's search engine is able to grab a chunk of
market share from Baidu, it could lead to downside to our price
estimate. That is why we are keen to know how Baidu's management
tackles rising competition and the strategies that it would adopt
to combat market share pressures.
Margins
We have maintained that online ad spending in the Chinese market
could grow at a slower rate due to the worsening economic
environment in the country. Our concerns were confirmed during the
fourth quarter as Chinese Internet company Tencent warned that
online ad spending growth is slowing. This slowdown in growth
combined with new competition that Baidu is facing could impact the
company's margins for two reasons.
First, the pricing power that Baidu enjoyed due to its near
monopoly is likely to hinder the company's ability to pass on cost
increases to advertisers. If it is unable to charge the same
premium for specific search keywords, we will see a decrease in
margins. Second, we could see the Chinese Internet landscape become
more like Silicon Valley in terms of competition for best engineers
and, with more competition for talent, Baidu will likely have to
push salaries higher to retain employees. Therefore, margins will
be an important factor to watch for this quarter as a fall in
margins to around 50% would cause 10% downside to our price
estimate.
We currently have a
$125 price estimate for Baidu
, which is approximately 15% above the current market price.
Click Here To Understand What Drives A Stock at
Trefis