Comparisons between Chinese internet search company Baidu (BIDU) and Google (GOOG) are inevitable, and commonplace enough to become a little clichéd; but they are still pretty accurate. The thing is, BIDU has the enormous advantage of being able to learn from GOOG’s (few) mistakes and copy their successes. They can position themselves to take advantage of trends and follow the example of their big American counterpart.
So it is with mobile applications. Google’s continued success has been at least partially attributable to the company’s success at monetizing mobile search. Baidu has learned from Google’s dominance and invested heavily in that area. That investment is paying off. BIDU has surged after yesterday’s Q4 earnings, despite a miss on the bottom line. EPS of $1.29 fell short of street estimates of $1.38, but strong guidance for next quarter has produced the positive response. The real news, though, came in the mobile area. Mobile search revenue has increased around 150% in the last two quarters. That isn’t a typo; mobile search revenue is exploding.
In many ways it goes against the grain to recommend a stock that has appreciated over 100% in the last 7 months, has jumped since yesterday’s close and is priced at close to 40 times trailing 1 year earnings, but it could well be that the price still hasn’t caught up with that phenomenal growth in mobile given a forward P/E around 5. That number is particularly low because, in the last few months investors have preferred rival Qihoo 360 (QIHU) as you can see.
That stock may also have further upside given that QIHU have increased their share of desktop search queries to around 25%, but as the Chinese market increasingly shifts to mobile the effects on BIDU’s profitability that competition brings may be muted.
Obviously the potential size of the Chinese market is huge and that ridiculously low forward P/E could be a result of the failure of investors here to really get their heads around it. Given the potential size of the market, there is no reason why both BIDU and QIHU couldn’t both still represent value, even after their recent meteoric rises.
There is always the risk that if Chinese growth continues to slow or problems in emerging markets resurface BIDU could be dragged down in the general pessimism, but it is hard to see that potential scenario as anything but a possible temporary setback. In the long term it looks like Baidu is well positioned to benefit as more Chinese businesses adapt to the growth in the mobile market and I have said before that, even if it’s slowing, 8% growth is not to be sneezed at.
On the conference call following the release, Baidu Chief Executive Robin Li said that by the end of 2013 about 60% of the company’s customers had websites geared towards mobile devices, compared to hardly any at the start of the year. It is likely that the full revenue and profit implications of that shift are yet to be felt.
The potential here is, quite frankly, staggering and it is hard to escape the conclusion that even though at first glance the chart looks a little scary, Baidu still has a long way to go.