Baidu's New Search Rival Is the World's Most Valuable Startup

Baidu's (NASDAQ: BIDU) stock has plunged nearly 60% over the past 12 months amid concerns about its slowing ad sales and declining profits, as well as competition from rivals like Sogou (NYSE: SOGO), Alibaba's (NYSE: BABA) Shenma, and Tencent's (OTC: TCEHY) WeChat. The economic slowdown in China, the escalating trade war, and the yuan's depreciation have exacerbated the brutal sell-off.

Baidu's net loss in its first quarter, the first time it saw red ink since its IPO, also indicated that the company spent too much cash on marketing efforts and expansions into adjacent markets -- including driverless cars and AI speakers -- without improving its core advertising business.

A man uses a search engine on a laptop.

Image source: Getty Images.

Baidu is still the most popular search engine in China, but QuestMobile's latest rankings indicate that it's only the 10th most popular mobile app. Tencent's QQ and WeChat top the list, followed by Alibaba's Alipay and Taobao. ByteDance's TikTok (known as Douyin in China) ranked seventh, which indicates that the growing Beijing-based startup could become a thorn in Baidu's side.

ByteDance hit a valuation of $75 billion after its latest funding round, making it the most valuable startup in the world. Its family of apps already serves a massive base of Gen Z users in China, the U.S., and other markets, and it recently launched a new mobile search engine to challenge Baidu. Should Baidu's investors be keeping an eye on this growing rival?

Understanding ByteDance's strategy

ByteDance's two most popular apps are TikTok and Toutiao. TikTok, which has over 500 million monthly active users (MAUs) worldwide, lets users create short musical videos. Toutiao, the top news aggregator app in China, has over 120 million daily active users (DAUs).

ByteDance leverages the popularity of TikTok and Toutiao to expand its digital ecosystem. It launched Mini Programs for TikTok, which let users access other services (like games, purchases, deliveries, and payments) without ever leaving the app. Baidu, Tencent's WeChat, and Alibaba-backed Alipay all offer similar Mini Programs.

ByteDance also introduced the TikTok-linked video chat app Duoshan, a stand-alone messaging app called Flipchat (with integrated payments from Alipay), and the work collaboration platform Lark. ByteDance even recently confirmed its plans to launch a branded smartphone with pre-installed apps in select markets. That's why it wasn't surprising when ByteDance expanded that reach with a mobile search engine.

A group of young people use their smartphones.

Image source: Getty Images.

How could ByteDance hurt Baidu?

Baidu, Sogou, and Shenma's mobile search engines scour the internet for results. Tencent's search engine for WeChat allows users to look for topics in news articles and posts from friends. ByteDance's search engine, which was launched as a new feature for Toutiao, searches through Toutiao's aggregated news articles as well as the World Wide Web. Toutiao's mobile search engine will likely launch external articles in its own browser to lock users into its walled garden.

Simply put, ByteDance is leveraging its strong position in the social media market to challenge older search engines like Baidu, which lack that social component. Baidu offers social media features on its Tieba platform, but that's a sprawling network that has more in common with Reddit than streamlined mobile apps like WeChat, TikTok, and Toutiao.

TechCrunch claims that over 100 people from Baidu, Alphabet's Google, and Microsoft's Bing have joined ByteDance in recent quarters and that the startup is still hiring more people for its growing search division. According to a recruitment listing on WeChat, ByteDance is building a search engine aimed at serving "hundreds of millions of mobile users in China."

Should Baidu be worried?

Baidu is trying to widen its moat against disruptive challengers like ByteDance and Tencent with Mini Programs for its mobile app.

Baidu's DAUs for its mobile app grew 28% annually to 174 million last quarter, giving it an audience roughly as large as Toutiao's. It also stated that MAUs for its Mini Programs rose 23% sequentially to 181 million. Baidu still controls nearly 90% of China's mobile search market, according to StatCounter.

This indicates that ByteDance's search engine for Toutiao won't steal Baidu's crown anytime soon. But if ByteDance gradually integrates its search engine into other apps like TikTok, its reach could expand like wildfire -- especially among Gen Z users. Therefore, Baidu's investors shouldn't panic, but they should keep an eye on this nimble rival.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Baidu and Tencent Holdings. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Baidu, Microsoft, and Tencent Holdings. The Motley Fool has the following options: long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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