"The best defense is a strong offense."
For the first time in a long-time things don't look too rosy for
). This is kind of hard to imagine considering the way things have
gone for the Chinese search giant over the past few years. Thanks
to Google (
) throwing in the towel and a perfectly executed customer
transition to the Phoenix Nest platform, Baidu shareholders have
had little to do but sit back and watch money roll in.
Over the span of just two years management quadrupled revenues
and nearly quintupled profits which in turn generated a 15 fold
increase in the share price. Nothing could go wrong. Baidu was the
perfect stock, a search monopoly in the middle of a growth boom in
the world's fastest growing major economy.
But nothing lasts forever, especially on the internet, and over
the past six months Baidu shareholders have started to discover
just how quickly fortunes can turn. A stock which could do no wrong
has now become a chronic underperformer. Upstart competition has
emerged out of seemingly nowhere, and management which used to
spend conference calls celebrating their performance is now talking
about navigating transitions. Yep, Baidu is suddenly on the
defensive, which is why now is the perfect time for them to make a
Attack of the Mobile Disease
I have not written a dedicated piece on Baidu, but ever sinceits
Q2 bounce I have been shorting the stock on and off on a mobile
monetization infection thesis. Basically, take Facebook's (
) much publicized headache and apply it to a more emerging economy
like China where the mobile transition is likely to play out a lot
faster. The trade has worked out pretty well. Baidu's recent
earnings and guidance quickly provided confirmation of this thesis,
and if someone still had any doubts, listening to management on the
conference call was all that was needed to eliminate them.
Gems from the
"I would like to remind everyone that this is not the first
time Baidu has navigated a complicated transition."
"We believe in the mobile future, and that future is arriving
fast. And Baidu is in a great position to meet the challenges and
exploit the opportunities brought by this PC to mobile
"This shift will also require a period of retooling and
customer education as we show them how to take full advantage of
the mobile internet opportunity. We are fully committed to
pushing this transition forward and confident that our efforts in
mobile monetization will pay off in the long run".
"I want to emphasize that there will be a transition period
lasting a couple of years before the mobile monetization gap will
After listening to comments like these, one can't help but think
that the 800lb gorillas looks vulnerable for the first time in a
long time. Do you think it is a coincidence that Qihoo's (
) most likely over hyped threat is occurring during the mobile
transition headache? I don't think so. But while I am not seriously
concerned about Qihoo becoming a thorn in Baidu's backside, I am
worried about the mobile monetization disease emboldening
competitors. Google is probably looking at this situation right now
and sniffing an opportunity. How hard would it be for them to throw
some of their muscle behind Qihoo at this stage or even reevaluate
entering the market? Baidu's management team has to be thinking
about these things, and they have to be worried about how the
landscape will look a few years from now if they don't manage this
transition to perfection.
While Sina (
) might not be generating Baidu like profits, they do have
something that Baidu doesn't have, China's hottest web property.
Sina Weibo has taken China by storm over the past few years and has
slowly woven itself into the heart of the nation's technological
culture. You can credit Sina management for this as they have done
a fantastic job of copying the old Zuckerberg playbook and focusing
on the user experience at the expense of monetization. And this
experience has become highly mobile in nature...
"Among the daily active users, 69% used the mobile terminals to
access the Weibo in the month of June, as compared to 64% in the
month of March." Sina
With roughly 70% of Weibo's 37 million daily active users
accessing the service via a mobile device, Baidu has plenty of
reasons to consider making a defensive acquisition here. Because if
Weibo was to fall into the wrong hands, you can guess who, Baidu's
mobile headache might turn into a ruptured cerebral aneurysm.
But maybe Baidu has figured this out already.
Over the past few months Baidu has made some interesting
1) They shut down their Weibo service
2) They bought out Providence Equity Partners' stake in online
video platform iQiyi
3) They filed to sell two tranches of senior notes
Buying Sina wouldn't be a giant leap from here. At a current
enterprise value of less than $3billion, Sina is worth one tenth of
Baidu and thus would make for a sizable but affordable acquisition.
And my guess is Sina would be quite receptive to the deal as
Baidu's search moat and financial muscle would allow them to
accelerate their monetization plans.
Honestly, when you think about it, it is hard to come up with
any reasons why this marriage shouldn't happen sometime soon.
I am long [[SINA]]. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
Does SoftBank Eliminate All The Risk In Buying