Earlier this week, Baidu (
) reported earnings and guidance that largely disappointed market
participants resulting in a 10% plunge. Is it worth jumping in
[caption id="attachment_57355" align="alignright" width="300"
caption="Baidu could be interesting at these levels"]
Baidu, often referred to as the "Google of China" by American
pundits, has seen its market dominance in its home market
challenged recently. The firm has dominated Chinese search since
) 2010 exit.
However, as smartphone growth has exploded in the Middle
Kingdom, a significant chunk of the search market has gone mobile
-- not necessarily to Baidu's benefit.
The emergence of mobile search has opened the door to new
competition; in particular, relative newcomer Qihoo 360 (
) has grabbed 10% of market share.
While Baidu's 60% share of search remains impressive, these
numbers represent a year-over-year decline. As others had
prognosticated, the company has been forced to
drastically increase its spending
in an attempt to fortify its mobile search position.
Like Facebook (
), Baidu has also struggled to effectively monetize its existing
mobile users. Consequently, Baidu has invested heavily in mobile
advertising technology, but the company has
yet to stem the decline in revenue growth
As indicated in its earnings call this week, Baidu's revenue
growth slipped from 82% year-over-year in the fourth quarter of
2011, to 42% in the fourth quarter of 2012. With guidance coming in
for next quarter at 38-43% growth, this trend looks unlikely to
reverse in the near term.
Technically, as Tim pointed out yesterday, this stock is broken
and it looks like a
test of December lows may be in the cards
. Such a drop could provide a compelling short-to-medium term
However, Baidu's long-term future looks a little more
complicated. While the company offers an internet portal with a
wide array of internet services, Baidu doesn't have
anywhere near the innovation chops of Google. While the future
profitability of endeavors like Google Fiber and unmanned vehicles
remain in question, there's little doubt that the guys and gals of
Google have the potential to create the next disruptive
There is little tangible evidence that Baidu could produce the
next game-changing platform. Baidu's weak search algorithms,
reliance on tacit government protection, and its inability to
create the next big thing could see the company left behind in the
Web 3.0 era.
Author is long BIDU call spreads; author may initiate a short
position in BIDU over the next 72 hours.