Baidu (NASDAQ:BIDU) announced this week that it is releasing its new mobile Internet browser in an attempt to capitalize on the lucrative smartphone search market. Additionally, it stated that it will also be investing in a new cloud computing center aimed at changing the way Chinese consumers access data from their mobile devices. We think these initiatives by Baidu are similar to Google’s (NASDAQ:GOOG) on the mobile front and can help the company gain a strong foothold in the nascent Chinese smartphone industry.
Baidu is China’s largest search engine by far, controlling approximately 85% of the market, according to our estimates. However, since the Chinese smartphone market is still relatively untapped, the company has seen most of its searches come from PCs. With a mobile browser offering, we think Baidu will be able to gain an early foothold in mobile search. If executed properly, this is a huge opportunity to create another source of revenues as smartphone penetration grows.
For now, we have not separated the mobile advertising segment from the PC advertising segment in our model, but will do so once we have some concrete numbers highlighting Baidu’s progress on the mobile front. However, we can still examine the impact that mobile advertising could have on Baidu’s revenue per search.
A segment of smartphone searches is usually driven by individuals looking to find local destinations such as restaurants or stores. Since this is a relatively targeted search, it should allow Baidu to charge more for locally targeted ads; a well-placed mobile ad has high probability of generating sales. An increase in ad prices will increase average revenue per search and can provide upside to Baidu’s value, going forward.
Overall, we think this new mobile offering bodes well for Baidu. With rapid expansion of the the global smartphone industry and the expected expansion of the Chinese smartphone market, we think the company is smartly positioning itself to capitalize on the increase in smartphone penetration.
We currently have a $123 price estimate for BIDU, which is approximately 10% above the current market price.