- Baidu has an exceptional financial track record coupled with great potential.
- The challenges include macro-economic risks surrounding the Chinese economy.
- Baidu is attractive post the recent pullback in stock price.
Chinese internet search giant Baidu (NASDAQ:BIDU) never ceases to amaze with its stellar performances. In 2014, Baidu’s stock has been weighed down by a mix of macro-economic and geo-political concerns. Even as Russia’s annexation of Crimea spooked global markets, China’s poor economic outlook catalysed Baidu’s 20% fall from its 52 weak high of $189 a share. There are risks in the near term, but at its current valuation, we think Baidu is very attractive for the long haul.
Baidu: Revenue Growth and Profitability
In one word, Baidu is financially robust. Given that Baidu is investing in a variety of businesses, it isn’t surprising that its profit margins have contracted. That said, even after a decline in growth rates and profit margins over the last 3 years, Baidu’s numbers are exceptional.
Baidu still manages far higher growth rates and profit margins than its peers, Google and Yandex. The chart below shows the 3 year revenue and profitability trend of Baidu.
FY 2013 saw Baidu’s operating margins fall to about 35% from 50%+ in FY 2011 and FY 2012 as a result of two major factors:
- Increase in cost of revenue or COGS due to higher bandwidth and content costs linked to its recently acquired online videos site ’iQiyi’. Further COGS were elevated by higher traffic acquisition costs (TAC) due to increased advertising on partner sites, a trend that we also observed with Yandex.
- Increase in other operating expenses due to increased promotional spends for mobile products and additional hiring.
However, we still think Baidu’s profit margins are enviable. It will be interesting to see how things pan out in the coming quarters as we see the impact of Baidu’s recent acquisitions.
Key Growth Highlights
Baidu’s giant strides in the mobile space have been the key highlight of its growth in FY 2013. With Mobile platforms driving the future of online businesses, mobile user growth and monetization are critical.
In Q4 2013, 20% of Baidu’s revenue was generated on mobile platforms marking a big jump from 10% in Q2 2013. In 2013, the company incentivized over half of its customers/advertisers to develop mobile optimized landing pages by providing them with convenient billing systems and tools to measure ROI.
Key Drivers of Future Growth
Baidu is clearly focused on mobile platforms and has started by upgrading to a search app that’s 60% faster. Its acquisition of 91 Wireless is aimed at strengthening its position in mobile app and game distribution, mobile advertising, cloud storage and payment app platforms. Baidu has also launched its ‘Baidu Phone Protector’ app to grab a share of the mobile security market.
Baidu has been leveraging its strength in maps to deepen its location based services (LBS) with the integration of ‘Nuomi’, a group buying (local deals) platform. Baidu now completely owns Nuomi and will use the company to drive its e-commerce and LBS ambitions.
Baidu’s 55% stake in US listed Chinese travel and e-commerce business Qunar, represents its share of the online travel industry in China which has been growing at 22% annually. Apart from buying iQiyi, the biggest online video site by unique mobile users, Baidu is also dabbling in fashion retail with a $15 million financing round in fashion website Yoka, and hardware like cloud enabled security camera imeru; a wireless music box priced at $16; routers and a Chromecast clone. under the brand Xiaodu.
Possibly the most exciting of Baidu’s multiple ventures is its foray into cloud services and how it could leverage it. Baidu recently launched a website Dulife to serve as a platform for smart wearable device manufacturers to showcase and market their products. These devices collect data ranging from the user’s blood pressure to sleep patterns, calories burned, location and movement. All data thus collected will be stored on Baidu’s cloud for future use. If Baidu can leverage this big data, this could be its gold reserve.
Baidu trades at a slightly higher Price/Earnings multiple when compared to Google. However, given that the company is far ahead of its peers in terms of revenue growth and profitability, we think it offers great value at its current valuations.
The near term challenge for Baidu will be to sustain its profitability as it integrates its acquisitions. The economic headwinds for China could pose a challenge in the short term, but it wouldn’t impact its long term prospects. While Baidu’s long term potential earns it a spot on our positive watch list, we will be keen to see how Baidu negotiates the next couple of quarters.
To see Baidu’s current stock price, please click here: (NASDAQ:BIDU)