Baidu and short-term thinking investors

baidu logo

Baidu is a Chinese language search engine – I (and many others) basically call it the young Google of China (when Google was primarily focused on search). I’ve owned Baidu in the past – with the investment thesis always based on the general idea that as China’s online and middle class population continue to grow, Baidu would be one of those companies to benefit. This is still the case today with still under 50% of China’s population.

At a Glance:
Symbol: US:BIDU
Price: $85.40
Market Cap: $29.8B
Yield: N/A
Me Wife Mom
Stock
Option

Last week, Baidu announced earnings for the first quarter of 2013 and investors did not take them well and the stock has lost about 7-8%.

  • Revenue increased 40% to $961M
  • Net income increased 8.5% to $329M

Most companies would kill for those kind of numbers but the biggest concerns I’ve been reading are a) potential continued loss of market share and b) shrinking margins.

When I last invested in Baidu in 2010, Baidu owned 95% of China’s search market. The remaining 5% belonged to Google. Net margin was north of 40% and Google was threatening to leave the China market. Today, it looks as if Baidu still owns a healthy 80% of the search market but there’s a lot more competition than 2 years ago from the likes of Sohu, Qihoo, etc.. Their most recently earnings announcement also drops profit margin into the mid-30s.

I’m not too concerned by the market share bit – it looks like Baidu still has the majority of the market; and with revenues growing by 40%, it doesn’t seem as if they’ll losing that much share, or at least that quickly.  Remember that there’s still the remaining 50% of China that has yet to get on the internet.  Now, that may take some time – there are many social-economic issues that China must deal with; addressing the population that live in poverty that today definitely can’t afford food much less the internet.  Certainly, we’re also looking for the current middle class of China to continuing growing their online needs.

Shrinking margins looks to be mainly from increased expenses on the promotion (discounting) and R&D side – up over 75%+ year-over-year for both. Baidu faces the same problem their North American counterparts (Google, Facebook, Yahoo, etc.) face which is how to monetize search on a mobile platform. Yes, a greater % of the population is getting access to the internet; but the number of folks transitioning to using the internet on mobile phones/tablets/etc. versus using traditional desktops is growing even faster. It’s easier to build an ad platform for a desktop and a little tougher on a mobile platform when screen real estate is limited.

Unfortunately, these growing pains don’t seem to sit well with short-term investors (they’re always looking for  immediate results).   It also doesn’t help that Baidu has spoiled past investors with margins as high as 50%!  I suspect Baidu will have a few more quarters where expenses continue to grow faster than revenues and further lower margins. I don’t mind holding through this phase (we’re looking long term after all!), but am going to keep a close eye to ensure all that money invested in R&D begins to show some progress.

Advertisements

One thought on “Baidu and short-term thinking investors

  1. Pingback: Can these companies continue to monetizing mobile? | Fearless Cal's Investment Journal

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s