- China’s digital advertising spends are expected to grow by 30% in 2015.
- Baidu’s revenue share of ad spends is expected to grow.
- Baidu’s 2015 revenue looks poised to exceed analyst estimates.
- Baidu valuations could have a significant upside potential for long term investors.
Baidu’s 2015 revenue could exceed analyst estimates and drive Baidu valuations, providing investors with an opportunity worth considering. As per projections of digital ad spends in China, and Baidu’s growing revenue share, the search giant is poised for a good year in 2015. Any corrections could serve as opportunities, as Baidu valuations indicate a further upside in 2015.
Baidu earns almost all of its revenue from online advertising. So, undoubtedly, its fate is tied to China’s digital ad spends, which are on the rise. We look at the trends in China’s digital advertising spends and Baidu’s share of revenue to project its 2015 revenue and assess the impact it could have on Baidu valuations.
China Digital Advertising Spends in 2014 & 2015
eMarketer pegs China’s digital advertising spend in 2014 at $23.7 billion, or RMB 148.1 billion (exchange rate of USD = 6.25 RMB used for all figures which are not directly taken from Baidu’s earnings release).
eMarketer expects digital advertising spends in China to grow by 30% in 2015, to touch $30.8 billion, translating to about RMB 192.5 billion.
Baidu’s Revenue Share Of China’s Digital Ad Spends 2014 & 2015
According to a report by eMarketer, Baidu accounted for 28.9% of the total digital advertising spends in China in 2014.
A 28.9% revenue share of the total $23.7 billion (RMB 148.1 billion) market, translates to a revenue of $6.58 billion (RMB 42.8 billion). These projections, which came out a day before Baidu’s Q4 results, are very close to Baidu’s actual numbers.
Do note that Baidu’s revenue share and revenue projections thereof pertain to its net revenue, which is, Baidu’s total revenue excluding Traffic Acquisition Costs (TAC). Apart from serving ads on its owned and operated sites (O&O), Baidu also serves ads on sites/publishers in its partner network, called the Baidu Union. Baidu shares the revenue generated by ads on these sites, and TACs are the costs it incurs when it pays these publishers.
For 2014, Baidu registered a revenue of RMB 49.05 billion ($7.9 billion), with advertising revenue of RMB 48.5 billion ($7.8 billion). TAC came in at RMB 6.33 billion ($1.02 billion) for the year, with ad revenue excluding TAC coming in at RMB 42.2 billion ($6.8 billion).
Baidu’s net revenue (revenue ex TAC) was lower than eMarketer’s projection by about 1.5%. You could watch our Baidu stock analysis video to get a quick roundup of Baidu’s Q4 2014 results.
Baidu Revenue Projection For 2015
eMarketer expects Baidu’s revenue share of China’s digital advertising spends to move up to 32.2% in 2015, and 34.6% in 2016.
Based on eMarketer’s projections of digital ad spends in China for 2015, and Baidu’s projected revenue share, Baidu’s net revenue should come in at about RMB 62 billion ($9.92 billion).
In 2014, Baidu’s TAC rose to 13% of online marketing revenue or ad revenue, with its Q4 TAC at 13.6% of ad revenue. The management expects this cost to rise gradually as a percentage of revenue, as it did in 2014. Assuming a TAC of 13.6% in 2015, Baidu’s ad revenue should be about RMB 71.7 billion ($11.48 billion).
Making room for a 2% deviation from eMarketer’s projection, Baidu’s ad revenue would be RMB 70.3 billion or $11.25 billion.
Given that online marketing revenue is about 99% of Baidu’s total revenue, Baidu’s 2015 revenue should come in at about RMB 71.13 billion ($11.38 billion).
Baidu 2015 Revenue Analyst Estimates
After Baidu’s recent earnings release, analysts have revised their 2015 revenue estimates downwards, from RMB 69 billion ($11.04 billion) to RMB 68.44 billion ($10.95 billion).
Going by eMarketer’s projections, Baidu could potentially beat analyst estimates of Baidu’s 2015 revenue.
After a brief one day slide post its Q4 earnings, Baidu’s stock rebounded strongly the day after. At $212 a share, Baidu valuations are as follows:
- Baidu Price to Sales ratio - 9.5
- Baidu PE ratio – 35.2
However, since Baidu’s growth rates and profit margins have both shown signs of decline, we would prefer to be conservative and see what happens if Baidu only commanded a Price to Sales ratio of 8 in 2015.
At a Price to Sales multiple of 8, with its full year revenue projection of $11.38 billion, Baidu valuations indicate a 22% upside potential, with a price target of $258 a share.
However, if Baidu continued to command the price to sales multiple it currently does, the upside potential could be significantly higher.
Baidu was one of the best performing Chinese internet stocks in 2014 and seems poised for a good year in 2015 as well. Baidu is one of our top stock picks and has returned over 40% since we added it to that list.