- Baidu is China's largest search engine with around 80%
share of the search market in the country.
- Since 2008, the company's revenue has grown by more than
60% annually to $3.5 billion in 2012.
- Baidu's search market share has benefited from Google's
exit in 2011. We estimate Baidu's market share to decline in
the future due to rising competition from other search
providers and the company's less dominating presence on
- We also estimate that profitability will remain under
pressure on account of investments in the mobile platform.
) is the leading internet search provider in China. In addition to
helping users find information online, the company provides an
effective platform for businesses to reach potential customers.
Baidu's revenues have grown annually by about 65% since 2008,
topping $3.5 billion in 2012. The company derives about 60% of its
revenues from search advertising, the remainder coming from display
advertising and partnerships.
While Baidu dominates China's search market with over 80% share,
we believe this share will decline in the future due to heightened
competitive activity. The company is facing increased competition
from other leading internet search providers as well as newer
entrants. Additionally, Baidu's share in the booming mobile search
market is nearly half of its share in desktops. Though the company
has stepped-up efforts to enhance its mobile presence, it will
struggle to significantly increase its share in mobile, in our
Our price estimate of $143 for Baidu's stock
marks our valuation at a discount of over 15% to the current market
price. In this article we provide a snapshot of how Baidu generates
revenues and the key trends that impact its business.
See our complete analysis of Baidu here
Who are Baidu's customers? How does the company make
Baidu provides online marketing services to a diverse customer
base, which includes small and medium enterprises, large domestic
companies, as well as subsidiaries of multinational companies in
China. In 2012, the company had 596,000 active online marketing
customers across industries such as financial services,
technology services, software, online games, transportation,
tourism and ticketing.
Online marketing services include P4P (pay-for-performance)
services and other performance-based online marketing services.
While P4P customers pay when users click on ads placed on
Baidu search result pages or Baidu Union members' site, customers
availing other services pay based on performance criteria such as
the number of telephone calls brought to the customers, the
successful booking of air tickets or hotel rooms, or the number of
minimum click-throughs. The company also offers time-based online
advertising services under which customers pay according to the
duration of the advertisement placed on Baidu's websites.
What are the key trends impacting Baidu's stock
Rising competition is a threat to search advertising
Baidu's share of the Chinese search market has benefited in part
due to Google's troubles in the market, which culminated in the
firm's exit from China in 2011. Baidu's market share increased from
67% in 2008 to 82% in 2012. However, competition in the search
market has again increased due to the entry of Qihoo 360. Launched
in August 2012, Qihoo has already gained more than 15% share of the
market. According to T.H. Capital, Qihoo's market share increased
from 13.9% at the end of March 2013 to 15.6% by the end of June
Baidu also faces competition from other leading Chinese internet
companies such as Tencent and Alibaba. In September 2013, Tencent
expanded its presence in the search engine market by purchasing
36.5% stake in Sogou (a search engine by Sohu.com) for $448
million. We believe that intensifying competition in the
search engine market will negatively impact Baidu's market share in
Lower market share and monetization levels in the mobile
The Chinese internet market is in the midst of a transition
phase, with an increasing number of users accessing the web
with the mobile devices. Baidu has approximately
market share in the Chinese mobile search market, which is much
lower than its share in PCs and desktops. Monetization levels in
mobile search are low on account of the smaller screen size. Even
though we note that Baidu has improved its mobile monetization
levels in the last few quarters with increased focus on enhancing
its mobile platform, we believe the fragmented nature of the market
will make it difficult for the company to grow its market share
rapidly in the future.
Declining profitability due to investments in mobile
Baidu is facing pressure on its profitability due to increased
investments in mobile strategy and infrastructure. Mobile computing
is a key strategic area for Baidu, since people in China are
shifting from personal computers to mobile devices to access the
web. The company has taken some good steps in this space, such as
launching its own mobile OS and browser.
Increased promotional activities related to the distribution of
mobile products led to a 72% rise in marketing and promotion
expenses for Baidu in 2012. Consequently, the company's EBITDA
(earnings before interest, taxes, depreciation and amortization)
margin declined to 55% from 59% a year ago. We expect Baidu to
spend more on mobile related SG&A and R&D in the short-term
which will continue to put pressure on margins.
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