Baidu Investment Thesis

There’s no question that Alphabet’s Google (GOOG) is the search engine of choice worldwide. The company dominates search engine market share, controlling more than 85 percent of global search traffic as of January 2021. However, Google is missing in one key market – one that is growing steadily year after year: China. 

It’s not that Google (GOOG) never gained a foothold in China. It had a thriving Chinese search engine back in 2006. However, in 2010 a number of factors combined to persuade Google to leave China for good – and for the moment, it doesn’t seem the company has plans to explore a return anytime soon. 

So, what did that mean for Chinese consumers? Were they doomed to be search-engineless forever?

Certainly not.

Several Chinese companies stepped in to fill the void, and Baidu rapidly rose to the top. Baidu, often referred to as “the Google of China” hasn’t seen quite the same level of success as its US counterpart to date. However, many investors are curious about the company. 

Could it see Google-style growth? Can it duplicate Alphabet-style innovation? In other words, is Baidu a buy? Examining the Baidu investment thesis from top-rated analysts and skilled investors offers insight into what’s next for the business.  

Baidu Market Share Is Massive In Mobile

While Baidu’s share of the global search engine market is under two percent, it is the leading search engine throughout China.

The company holds 69 percent of the total Chinese market share – far ahead of its closest competitor, Sogou.

When it comes to mobile searches, Baidu’s dominance is even more decisive. The company controls 92.29 percent of China’s mobile search engine market share. Sogou barely registers with mobile search engine market share of just 3.06 percent. 

The only area where Sogou exceeds Baidu is desktop search engine market share. In that area, Sogou (SOGO) handles 54.41 percent of traffic as compared to Baidu’s 29.44 percent. However, since Chinese consumers rely on mobile devices far more than desktop computers, Baidu doesn’t consider this a realistic threat.

With that said, there is a figure that keeps Baidu leadership up at night – the time spent on Baidu vs. Sogou. Average browsing time is substantially higher on Sogou vs. Baidu, which is key to generating advertising revenue. 

Does Baidu Stock Have A Moat?

Baidu is often referred to as a wide-moat stock, primarily due to its leadership position in market share. However, detractors suggest that Baidu’s moat doesn’t have the durability necessary to fend off persistent competitors. 

Baidu attracts consumers now through its strong brand and its superior indexing and searching algorithm. It’s working to build engagement among consumers and connect them with advertisers through high-caliber data gathering and analysis. If the competition creates a more effective solution, there is little or no cost for consumers to make a switch. 

That is most evident in the struggles Baidu has had in growing its advertising revenue. Consumers don’t consider Baidu a site to spend time on – it’s simply the means to an end.

Instead, they devote browsing minutes to Chinese video-sharing site Bilibili, ByteDance’s content platform Toutiao, ByteDance’s Douyin – the Chinese version of international phenomenon TikTok – and Tencent’s WeChat.

As a result, these companies are far more successful in attracting advertising dollars. 

Is Baidu Growing Revenues? 

Baidu’s biggest source of revenue is advertising. It makes money from connecting businesses with consumers on its apps, portal sites, and search engine.

In the fourth quarter of 2020, online marketing services contributed 68 percent of the company’s total revenues, down from 72 percent for the same period in 2019. 

Unfortunately, the lack of success in keeping users engaged has brought advertising revenue down, and in turn, the company’s total revenues have not increased as sharply as investors would have liked.

Total revenue went up by five percent year over year, but that could have been higher with more support from advertisers. 

That’s a serious concern for investors, because Baidu’s claim that the decline in advertising sales is universal rather than Baidu-specific appears to be categorically false.

Other Chinese internet giants saw gains in their most recent quarters: for example, Tencent’s advertising revenue went up 16 percent year-over-year, and Bilibili’s (BILI) rose 126 percent. Clearly, there is advertising money to go around – it just isn’t going to Baidu. 

Nonetheless, Baidu has a history of growing revenues year-over-year dating all the way back to 2005. Over the past ten years, Baidu’s revenues have looked like this: 

• 2019 – $15.429 billion
• 2018 – $14.876 billion
• 2017 – $13.034 billion
• 2016 – $10.161 billion
• 2015 – $10.248 billion
• 2014 – $7.906 billion
• 2013 – $5.277 billion
• 2012 – $3.580 billion
• 2011 – $2.248 billion
• 2010 – $1.171 billion

The good news is that management expects to build on the two most recent consecutive quarters of sales growth over the next quarter. The guidance suggests a revenue increase of between 15 percent and 26 percent year-over-year for the next period.

If true, current shareholders may feel more secure in holding on to what they have, and new investors might consider buying in, though the stock has doubled in price since February 2020. 

Baidu Earnings Have Been Choppy

The bad news for Baidu and its shareholders is that the company’s earnings have been inconsistent. Worse, they have declined sharply over the past two years.

The company is struggling under the weight of unprofitable divisions. In addition to its inability to generate adequate revenue from advertising, it isn’t seeing the expected profits from online video platform iQiyi (IQ). 

True, Baidu divested iQiyi in 2018, but it kept its majority stake.

When iQiyi’s (IQ) growth was steady and reliable, those revenues made up for deficiencies in advertising dollars.

Unfortunately, iQiyi’s growth has stalled, joining Baidu’s cloud computing business in creating losses. Those losses have shown up in Baidu’s earnings in a significant way.

The good news is that analysts agree earnings per share are likely to increase in 2021 and 2022.

For the moment, the consensus is 6.82 this year and 8.59 next year. However, Baidu has a lot of work to do if it wants to meet those goals. Is the company’s leadership up to the challenge? 

Baidu Management Team Is World Class

Baidu’s Co-Founder, Chairman, and Chief Executive Officer Robin Li holds a tight grip on the company’s strategy and on-going operations.

He has a long history in the tech world, beginning with the invention of a hyperlink analysis system that contributed to the search engine technology in use today.

He worked as senior engineer in Silicon Valley’s InfoSeek, one of the first search engines, and he brought all of that expertise to Baidu when he returned to China and launched Baidu in January 2000. 

Li is an integral member of the world’s most elite technology communities. He holds the title of Vice Chairman for the Internet Society of China, and he has been recognized among the Top 30 Figures in China’s 30 Years of Reform.

He has appeared on Forbes’ list of China’s Best CEOs and World’s Most Powerful People, and he has been included in lists of Best Business Leaders in the World published by Time Magazine and Newsweek. 

In short, Li has what it takes to drive Baidu’s success from a technology perspective, and in keeping with Chinese tradition, he may be taking a long view on delivering results.

For now, it appears the company has a number of obstacles to overcome, but many industry and market experts are confident that Li – and Baidu – will ultimately prevail. 

Baidu Advertising Revenues Remain A Concern

Competition may pose the biggest risk to Baidu stock.

Certainly, Baidu has a decisive advantage in China’s search engine market share, but several highly successful companies have their sights set on closing the gap.

If Baidu is unable to entice consumers to engage within its ecosystem for longer periods of time, advertising revenues will continue to lag.

That could render the company unprofitable, leading to loss of the cash needed to pursue innovation that will ultimately expand and grow the business. 

Baidu Investment Thesis Conclusion

While Baidu may get things turned around through expansion into Artificial Intelligence (AI), Electric Vehicles (EV), and other technologies of the future, none of those projects are bearing fruit quite yet.

For the time being, better to keep an eye on Baidu’s progress and wait to buy if and when the company is on more solid ground. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.