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Investment Overview for Baidu (NASDAQ:BIDU)
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Below are key drivers of Baidu's value that present opportunities for upside or downside to the current Trefis price estimate for Baidu:
Search Advertising
- Baidu Revenue per Search: Baidu Revenue per Search increased from $3.5 per 1,000 searches in 2007 to around $5.7 per 1,000 searches in 2012, and we expect it to continue to increase to around $8.51 per 1,000 searches by the end of Trefis forecast period. Baidu's continuing dominance of China's internet search market (with market share at around 80%) and an on-going shift in ad spending online are some of the favorable factors for Baidu. These factors could help Baidu command high ad pricing from advertisers. If competition in the Chinese search market becomes even more scarce, RPS levels for Baidu can further increase. If RPS levels rise to around $9.5 by the end of Trefis forecast period, there could be an upside of around 7% to the Trefis price estimate. However, if RPS increases slowly to reach $6.5 by the end of Trefis forecast period, there could be a downside of 10% to the Trefis price estimate.
- Searches per Internet User in China: We currently forecast Searches per Internet user in China to increase from around 72 per month in 2012 to around 106 per month 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. This would come by if smartphone/tablet penetration in China increases at a higher than expected rate. If searches per internet user in China increase to around 120 per month by the end of Trefis forecast period, there could be an upside of 7% to the Trefis price estimate. However, if the growth rate slows down and the figure reaches 85 per month by the end of the forecast period, there could be a downside of 10% 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.
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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.
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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%. In comparison, Google, Yahoo and Microsoft have much lower market share.
Google reduced its share in China when it decided to shut its Chinese domain google.cn and re-route searches to its Hong Kong site.
Demand from online advertisers for keyword advertising on Baidu sites will continue to cause upward pressure on Baidu's Revenue per Search.
Low Internet penetration compared to developed countries
The Internet penetration rate in China has steadily increased from 19% in 2008 to 40.1% in 2012. 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.
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Increase in R&D and SG&A costs
The company's margins decreased sharply in Q1 2013 on account of increased R&D and SG&A expenses. These are associated with the company's mobile strategy wherein its developing advanced mobile products and undertaking promotional activities to increase the adoption of its mobile product portfolio.
We expect 2013 expenses to be much higher than 2012 levels.
Increasing competition
Lately Baidu has faced increased competition in the search market from newer players such as Qihoo. Qihoo, which was launched in August 2012, has already gained 10% market share. It aims at increasing its market share to around 40% in the next 3-4 years.
Growing Mobile Search
We expect increasing adoption of Internet search capable mobile phones, higher mobile Internet speeds, and increasing partnerships between search engines and mobile phone manufacturers.
The number of mobile Internet users is likely to see further growth in the coming years with the launch of the third-generation (3G) mobile phone networks in China.
Baidu has launched its own mobile OS, Baidu Yi, which will be integrated with Baidu's services, and may help it drive mobile usage of its various offerings going forward.
Growth in music search in China
MP3 search and music downloading, which may be perceived as a copyright violation in advanced markets, are among the most popular online applications in China.
Trefis Forecast Rationale for Baidu's Search Market Share in China
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Baidu's Market Share in Search represents the percentage of Internet searches on Baidu.com out of the total searches conducted in China.
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Baidu's Market Share in Search in China has increased from 56% in 2007 to 82% in 2012. Despite these increases, Trefis forecasts that Baidu's search market share will slowly decline to 74% by the end of our forecast period.
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Trefis considered the following factors for its forecast:
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- Increasing competition
- Baidu's market share has benefitted from Google's exit from China in 2011.
- The firm enjoyed a monopolistic position in the search market, but we think this will wane as new competition such as Qihoo gains traction.
- We think that this new competition will provide downward pressure on Baidu's market share over the coming years.
- Increasing mobile search mix
- Baidu's mobile search market share is much lower that its PC search market share.
- Estimates state that Baidu's search market share on mobile phones was approximately 35% in mid 2012.
- We expect mobile search share in total searches to increase over our forecast period. Therefore, we expect Baidu's total search market share to decline over the long term.
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- Increased focus on high growth Small and Medium Enterprises advertising likely to help increase ${forecast}
- Presence of a strong sales force and an established brand name will help Baidu penetrate this market segment which are more relationship driven. For the same reason, foray of foreign players in this segment remains difficult.
Back to Company OverviewHow 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.
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