Here’s What Matters For Baidu’s $115 Valuation
Quick Take
- Search advertising accounts for around 60% of Baidu’s revenues followed by display advertising which contributes 32% to its revenues.
- Baidu has around 80% market share in the Chinese search market, however, its share in the mobile search market is much lower.
- Going forward, we feel it will find it difficult to retain its market share as the competition is increasing with entry of players such as Qihoo.
- While Baidu is focusing on mobile to grow its business, it is also facing challenges related to monetization of mobile platform.
Baidu (NASDAQ:BIDU), a leading Chinese language search provider, posted revenues of $3.6 billion in 2012, with an operating margin of 49.5%. It derives around 60% of its revenues from search advertising. While it currently has around 80% share in the Chinese search market, we feel this share may decrease in the future on account of increased competition from newer entrants such as Qihoo, as well as growing usage of mobile Internet in the country. Baidu has a much smaller market share (35%) in the Chinese mobile search market, and we feel it will find it difficult to raise this number significantly as the market is fragmented with presence of large number of players.
While Baidu is focusing on mobile platform development and video vertical to grow its business, it is also facing challenges related to monetization of its mobile offering.
See our complete analysis of Baidu here
What Are The Major Segments Through Which Baidu Derives Its Revenues?
Baidu derives its revenues from search advertising, display advertising as well as search and content partnerships. Search advertising is the largest business for Baidu and it accounted for around 60% of its revenues in 2012 (as per our estimates). Baidu is the leader in the Chinese search advertising market with a market share of around 80%.
Display advertising (which includes revenues earned through visits on Baidu’s owned and operated sites) contributed for around 32% of its revenues in 2012. Search and content partnerships through Baidu Union (which includes a number of third-party websites and software applications), accounted for 8% of its revenues in 2012.
Who Are Baidu’s Customers And How Does It Sell Its Services?
Baidu serves a diverse base of online marketing customers including SMEs, large domestic companies as well as subsidiaries of multinational companies in China. In 2011, it had around 488,000 active online marketing customers in various industries including financial services, electronics, information technology services, software and online games, tourism and ticketing, transportation, etc.
Baidu search-based online marketing services’ include P4P (pay-for-performance) services as well as other services such as Brand-Link. While a P4P customer is charged when users click on ads placed on Baidu search result pages or Baidu Union members’ site, a Brand-Link customer is charged on the basis of the duration of his ad on Baidu search result pages.
What Are The Key Growth Strategies For Baidu?
Focusing On Mobile Platform Development
Baidu is focusing on mobile as its key strategic area as rising number of people in China are shifting from personal computers to mobile devices to access the web. Baidu aims to invest in mobile search development and mobile ecosystem to enhance its 35% market share in the Chinese mobile search market, which is much smaller as compared to its market share in PC’s. [1] It has taken steps in this direction by launching its own mobile platform and browser.
Focusing On Video
Baidu is focusing on the video vertical to grow its business. In November 2012, it increased its stake in iQiyi (a leader in the Chinese online video market) to attain a controlling position. It aims to leverage the video vertical to grow its user base and bolster its display advertising revenues. Growing usage of iQiyi through the mobile platform, will also help the company monetize its mobile business.
What Are The Key Risks To The Business?
Competition Is Increasing In The Chinese Search Market
While Baidu has a dominant position in the Chinese search market, however, it is facing increasing competition from newer entrants such as Qihoo, which are gaining traction in the market. Moreover, Baidu has lower market share (35%) on mobile devices. The mobile search market in China is fragmented with presence of players such as Tencent and Easou having market shares of 23% and 22% respectively. [1] Since the Internet market in China is in the midst of a transition phase with increasing number of users using mobile to access internet, we feel this factor will lead to a compression in Baidu’s market share in the future.
If Baidu’s market share in China’s search market declines to 65% by the end of our forecast horizon, it represents near 10% downside to our $115 price estimate for Baidu’s stock.
Monetization Slow From Mobile
While Baidu is making significant investments to bolster its mobile offering, we feel it will take some time for the company to realize significant monetization benefits from its mobile strategy. We believe this factor will put pressure on its margins in the near term.
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Notes:- Baidu’s Mobile Push: Not As Easy As It Seems, Seeking Alpha, August 4, 2012 [↩] [↩]