A new competitor to Chinese Internet search company Baidu (
) is worrying its investors, sort of the way Microsoft's (
) Bing once did for Google (
) investors. It's a helpful turn of events for anyone interested
in shares of Baidu, a company that remains Google's doppelganger
in a land of growth, in a world with a dearth of it.
Competition isn't the only reason investors in the $37.27
billion market cap Baidu have had to sweat lately. China's
rampant economic growth has slowed, and that's turned the raging
flood of new Internet users there into more of a fast river.
Profits from Baidu's mobile applications, which like here, are
seen as the future of growth, have been very slow to come.
Baidu's share price is down almost 20% in the past 12 months.
The problem for investors wasn't so much a hit to the income
statement - Baidu's revenue rose 50% in the third quarter to
$994.6 million, and profits shot up 60% to $478.6 million -- as
Baidu's share price height. Baidu shares gained more than 1,000%
between January 2009 and March of 2011 as the company gobbled up
the customers Google left behind when it exited China for
censorship reasons, and those gains took Baidu's share price to
phenomenal valuations. At times last year, shares traded at more
than 35 times sales and 75 times earnings. The price drop has
taken Baidu valuations out of the extraordinary and into, say,
popular U.S. restaurant territory, as on sees in the
BIDU PE Ratio TTM
The issues facing Baidu now have led to some defectors among
the very long line of analysts that usually recommend its shares.
On Wednesday, Citi analyst Ravi Sarathy cut his rating on Baidu
from buy to sell. Most others remain overweight on the shares
despite being forced to write down their earnings forecasts.
The Sarathy types are concerned about the costs Baidu is
racking up to ensure continuing dominance in search, where it
currently holds about an 80% market share. Of particular concern
is newcomer Qihoo 360 Technology (
), now a Bing-like competitor that previously stuck to browsers
and Internet security products. Qihoo has gobbled up between 8%
and 11% of search traffic in China since it launched its own
engine in August. This has made Qihoo's new investors pretty
Baidu management seemed to suggest at its earnings show
earlier this week that those Qihoo searches didn't come out of
its own pocket. Baidu reported advertiser growth of 28% for the
year. Regardless, expenses have gone up as it ramped up its sales
BIDU SG&A Expense TTM
Research and development costs also are up as it attempts to
make more fans and money through mobile search. Baidu's share of
mobile search is less than half of what it is for the overall
market, but it needs a stronghold on this fast-growing segment to
justify outsized share valuations. Its own mobile search traffic
was up 110% in the last year, but the company still struggles to
make significant money on this platform.
BIDU R&D Expense TTM
Mobile monetization has been a long slog for Baidu, and it has
tried its investors' patience. The company launched its first
mobile browser barely two months ago, although it already had
mobile operating systems and partnerships for cheap cell phones.
Wall Street had hoped for news on mobile progress with the
earnings announcement earlier this week but instead heard the CEO
suggest that mobile monetization might yet take a couple of years
, analyst say, will likely narrow while Baidu does that.
BIDU Gross Profit Margin TTM
Baidu has shown great competence in turning a service into a
money-maker before, and its slowness on the mobile tech front has
been a little confounding. But it's also hard to imagine any
competitor truly trashing such a heavyweight in the long run.
While a Bing comparison isn't completely satisfying, here it is:
market share for Bing, with the weight of Microsoft behind it,
grew to 15.9% from 14.7% in the last year, according to the
latest ComScore report. Google's share grew to 66.4% from 64.8%.
While Bing may actually be taking something from Google's hide,
it's not much.
Dee Gill is a contributing editor at YCharts, which
includes the just-released
YCharts Pro Platinum
for professional investors.