Baidu (NASDAQ:BIDU) is the leading online search provider in China. It will report its Q1 2013 results on April 25, 2013. The company’s stock price has fallen by more than 15% since the previous earnings were released on February 4. Uncertainty regarding the company’s future on account of rising competition and low mobile monetization has contributed to the drop in stock price. We will be keeping a track on any clarifications regarding these challenges as they will be the key for Baidu’s future growth.
Recap Of Q4 2012 Results
In Q4 2012, Baidu’s revenue grew by 42% to reach around $1 billion. While the 42% top line growth seems impressive, it is important to consider that the growth rate has slowed down as Baidu’s quarterly revenue growth averaged around 84% in 2011.
The Chinese Internet advertising market is expected to grow at a slower pace after experiencing rapid growth in the past. During 2013-2016, the Chinese online advertising revenue is estimated to grow at a CAGR of 26%.  It will be interesting to see Baidu’s growth pace relative to the overall growth in the industry in the future.
Margins Will Be Keenly Tracked
Baidu’s operating margin declined to 45% in Q4 2012, as compared to 51.3% in Q4 2011. The company has seen a massive increase in its R&D expenses, which grew by around 70% annually in Q4 2012. We expect the R&D expenses to keep growing in the short term as the company continues to add more R&D personnel to enhance its mobile products and develop innovative products.
Rising Competition In The Chinese Search Market
Baidu enjoys a near monopoly in the Chinese online search market with a market share of around 80% in PCs and desktops. However, the competition is heating up in the industry with the entry of newer players such as Qihoo. Launched in August 2012, Qihoo has already gained 10% market share. Its management aims to enhance its share to 20% by the end of 2013, and 40% by 2015. 
We are keen to see how Baidu aims to tackle this rising threat and the strategies that it will adopt to maintain its share in the market. Whether or not Qihoo is able to achieve its targets, we believe the rising competition could weigh on Baidu’s profitability in the future.
Mobile Monetization Concerns
Driven by rising adoption of smartphones, the Chinese Internet market is undergoing a transition with a growing number of people accessing the Internet via mobile. This has presented various challenges to Baidu as its its market share is much lower on mobile devices (35%) as of early 2012. 
We believe the company will find it difficult to raise its mobile market share significantly in the near future as the mobile search market is fragmented with presence of various players such as Tencent and Easou. While Baidu is aggressively taking steps to enhance its mobile product portfolio, we believe the mobile platform will continue to suffer from low monetization problems. We are interested in getting the latest news regarding Baidu’s mobile strategy and how it aims to increase its mobile monetization in the future.
Our $115 price estimate for Baidu’s stock, represents more than 30% upside to the current market price.Notes:
- China Online Advertising Revenue Impressively Increases 46.8%, iResearch, February 04, 2013 [↩]
- China’s Qihoo takes aim at Baidu with aggressive goal to capture 10% of local search market per year, The Next Web, February 27, 2013 [↩]
- Baidu’s Mobile Push: Not As Easy As It Seems, Seeking Alpha, April 4, 2012 [↩]