Chinese internet provider Baidu ( BIDU ) typically played the uber-Google ( GOOG ) for U.S. investors, providing shareholders phenomenal gains as its American competitor matured out of the land of super-growth companies. But Baidu has taken a couple of steps toward that transition itself recently, and it's making investors nervous.
Underperforming Google is not a natural state for Baidu.
Baidu shares gained more than 1,000% since its US IPO in 2006; 185% in 2011 alone. By comparison, Google's gains peaked at about 600% four years following its 2004 IPO. While Google investors in recent years have done well, the shares have yet to regain recession-era losses.
Has Baidu grown into Google? Several factors suggest the super fast growth of recent years is coming to an end, although the company likely will gain considerably in revenues and earnings for years to come. The question isn't whether the company will continue to grow - no one's betting it won't -- but whether its future successes can continue to fuel share price growth at its current incredible prices. The YCharts Stock Screener shows Baidu shares as the third most expensive large cap trading when using a price-to-sale ratio comparison. YCharts Pro gives Baidu great balance sheet strength but its worst possible score for share price valuation.
Investors ramped up shares to these levels because money has been pouring into Baidu. In the past three years alone, revenues are up 413% while profit rose 643%, largely because of a Chinese economic boom creating a new middle class. Baidu swamped competition with an 80% share of search from personal computers. When Google left China over censorship issues in 2010, Baidu simply sucked up most of that business.
A recent pause in China's rampant economic growth has slowed down consumer buying of things like computers and cell phones. Search competitors like Sohu.com ( SOHU ) and Sina ( SINA ) are growing more savvy. These companies and a few others control the lion's share of mobile (think smartphone and tablet) searches, leaving Baidu with about a 35% share there. It is mobile, not PC search, that will provide the fastest growth for internet search companies in the future.
Baidu is fighting for mobile business on several fronts, but it's expensive. Research and development costs have risen faster than revenues at a couple of points in the past few years.
Profit margins have been squeezed.
Last fall, Baidu announced a partnership with Dell ( DELL ) to develop smartphones and tablets with its own operating system. It also convinced Apple ( AAPL ) to make its search engine the default on Chinese iPhones, and it is launching its own smartphone.
While these are surely smart steps, they are not panaceas. Dell sells a lot of computers in China, but it's barely a player in the Chinese mobile market. Apple added Yahoo ( YHOO ) and Micosoft's ( MSFT ) Bing as default search engines on U.S. iPhones several years ago, but it didn't do wonders for either business. Google, too, has its own smartphone. Anyone own a Nexus One?
In a country where most of the population still hasn't bought their first computer or smartphone, Baidu's earnings growth potential remains great. But with the share price in the stratosphere and costs building, there's the potential to pay up for Baidu shares just as they take a turn for the worse. A little patience might make for a greater reward.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.