Baidu Continues Its Growth Momentum, But Profitability Remains Weak

by Trefis Team
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Baidu (NASDAQ:BIDU), the leading online search provider in China, posted strong revenue growth of 42.3% annually in Q3 2013 to $1.45 billion. Increasing monetization on the mobile platform, driven by rising popularity of mobile marketing contributed to the strong revenue growth during the quarter. Moreover, the company’s management expects top-line growth to accelerate in the fourth quarter. We are encouraged by this trend, as it indicates the company’s success against rising competition in the search engine market.

Meanwhile, Baidu’s operating margin slipped to 37.5% in Q3 2013 as compared to 52.7% in Q3 2012. SG&A and R&D expenses rose by 115% and 77% annually respectively, owing to an aggressive push by Baidu to develop and promote its mobile products. Consolidation of recent investments in the online video vertical (iQiyi) and increased infrastructure capacity further elevated the operating costs. While the drop in profitability is concerning, we believe Baidu is taking the right steps in increasing its investments. The Chinese mobile Internet market is rapidly evolving, and Baidu needs to enhance its market share in this market to retain dominance over the search engine market.

See our complete analysis of Baidu here

Baidu’s Mobile Strategy Is Yielding Results

Baidu is aggressively making investments in various parts of the mobile ecosystem to enhance its low market share in the mobile search market. This strategy is yielding positive results as the total installed base of its mobile search app grew by 50% sequentially to more than 330 million, at the end of Q3 [1] The company has also strengthened its app distribution capabilities, with the acquisition of 91 Wireless and by closely collaborating with app developers.

Moreover, Baidu has enhanced its location-based services with the recent investment in Nuomi (a group buying site) and improvements in product functionality. These have resulted in increased transactions on Baidu Maps. Other segments such as online gaming, personal cloud services, and online video are also being tapped by the company to bolster its future growth. While these investments will boost growth, we believe they will continue to impact the company’s profitability in the coming quarters.

Baidu Continues To Command Strong Pricing Power

Baidu recorded 464,000 active online marketing customers in Q3 2013, which represented an annual increase of 19%. However, the figure declined by 1% in sequential terms on account of increased efforts by the company to ensure the genuineness of its customers. [2] We believe this figure will continue to rise healthily in the future as mobile advertising is gaining traction in China and owing to aggressive marketing being undertaken by the company.

Revenue per online marketing customer, increased by 19% annually and sequentially to $3,121. We believe the significant increase in this metric is promising, as it indicates that increasing competition has yet not affected Baidu’s pricing power.

We are in the process of revising our $128 price estimate for Baidu’s stock.

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Notes:
  1. Baidu’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 30, 2013 []
  2. Baidu’s CEO Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 30, 2013 []
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