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Investment Overview for Baidu (NASDAQ:BIDU)
Below are key drivers of Baidu's value that present opportunities for upside or downside to the current Trefis price estimate for Baidu:
- Baidu Revenue per Search: Baidu Revenue per Paid Search increased from $0.14 in 2008 to around $0.25 in 2014, and we expect it to continue to increase to around $0.32 in the long run. Baidu's continuing dominance of China's Internet search market (with market share at around 80% by revenue) and an on-going shift in ad spending online are some of the favorable factors for Baidu. These factors could help Baidu command higher ad pricing from advertisers. If RPS levels rise to around $0.36 by the end of Trefis forecast period, there could be an upside of around 10% to the Trefis price estimate. On the other hand, if RPS increases slowly to reach $0.27 by the end of Trefis forecast period, there could be a downside of 10% to the Trefis price estimate.
- Search Queries On Baidu: We currently forecast searches queries on Baidu to increase from around 270 billion annually in 2014 to over 900 billion annually by the end of Trefis forecast period. However, individuals holding multiple devices like smartphones and tablets can increase this figure, as users increasingly find mobile devices as an additional tool to conduct searches. In the event this figure rises to 1,150 billion by the end of our forecast horizon, there could be an upside of 10% to the Trefis price estimate. However, if the growth rate slows down and the figure reaches only 800 billion by the end of the forecast period, there could be a downside of over-15% to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Baidu at the top of the page.
Touted as the Google of China, Baidu has risen to become the number one Chinese language search provider and the most trafficked website in China. Baidu's main search operation provides search for websites, audio files, and images.
Baidu offers a unique Chinese language search platform to both users and customers. This platform consists of its own websites as well as the Baidu Union, a network of third-party websites and software applications. By generating traffic from its users, Baidu is able to attract business customers that wish to advertise their products and services alongside Baidu's search results and on Baidu's web properties.
Like Google, Baidu makes the majority of its money from its search operations. Baidu's search advertising business is driven by two important factors that contribute to its significance:
Search market share dominance of Baidu over Google and Yahoo in China
Baidu dominates the search advertising market in China with a market share of around 80% (by revenue). In comparison, Google, Yahoo and Microsoft have much lower market share.
Though Qihoo 360 and Sogou have emerged as credible players in in the desktop online search market, Baidu has gained dominance over the country's mobile search market.
Demand from online advertisers for keyword advertising on Baidu sites could continue to cause upward pressure on Baidu's Revenue per Search.
Low Internet penetration compared to developed countries
The Internet penetration rate has steadily increased from 19% in 2008 to 47.9% in 2014. China’s Internet penetration rate remains low compared to developed countries (North America, for example, has a penetration rate of around 78%).
Low penetration rates translate into better opportunities for growth as the user base still remains low compared to the total population of the state.
Threat To Market Share
Baidu’s market share on desktop search has decreased significantly over the recent past. It fell from 80.4% in August 2012 to 54.0% in August 2014 (according to DAO Insights , a Chinese social insights platform) During the same period, the market share of Qihoo 360 and Sogou increased from 1.2% and 7.5%, respectively, to 29.2% and 14.7%, respectively. Nevertheless, Baidu has been able to retain its dominance over the mobile search market (commanding more than 80% market share). Yet Qihoo 360 is taking aggressive measures to increase its share in the mobile search market to 30% within the next two years. If it does so, it would cause a serious dent in Baidu’s market leadership. Additionally, since Qihoo and Sogou are ramping up their search monetization, this could also impact Baidu’s ability to raise prices on ad units. Hence, the threat to Baidu’s market share is significant and could cause serious problems in the future.
Slowing Revenue Growth
Baidu’s stock has fallen in the recent past after Q1 2015 earnings; this was since the company under-performed on top-line growth. Though consensus estimate for revenue was pegged at RMB 12.908 billion for Q1 2015, the same came in at RMB 12.725 billion. Moreover, the company’s guidance for revenue growth in Q2 in the range of 36.5% to 39.7% came in softer than expected. This slow-down in top-line growth, coupled with acceleration in expenses, has resulted in decreased margins for the company.
Growing Mobile Users
Driven by rising adoption of mobile Internet and smartphones, Baidu's mobile search users are growing explosively. In Q1 2015, the monthly active Baidu mobile search users were seen at 600 million, as compared to 540 million in the prior quarter. Moreover, the monthly active users for Baidu mobile maps reached 270 million. We expect these figures to continue to grow sharply over our forecast horizon.
O2O E-Commerce Initiatives To Drive Baidu's Growth In The Long-Run
Baidu aims to fuel the next chapter of its growth with O2O e-commerce initiatives.These include services to connect users to merchants such as online travel, ticket booking, entertainment, food delivery, as well as grocery and other services. The company’s management expects this to be a RMB 10 trillion market opportunity.
In Q2 2015, the GMV for O2O and other services (which includes Qunar, Baidu Nuomi, Baidu Takeout Delivery, and other products) rose by 109% annually to RMB 40.5 billion. While these services could accelerate top-line growth at Baidu, they are expected to lead to dilution in margins in the near-term.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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