Here Are The Key Challenges Impacting Baidu
Baidu’s (NASDAQ:BIDU) stock has come under pressure in the recent past — it has decreased by around 10% over the last six months owing to concerns related to slowing revenue growth and decreased margins. Although Baidu commands around 80% of the Chinese search engine market (by revenue), its share (in terms of queries) has decreased considerably on PC devices. [1] This has also led to concerns that Baidu’s dominant market share on mobile search could trend in a similar manner as it has on PC devices. Coupled with low monetization rates on mobile searches, these factors have played into the slowing top-line growth for Baidu.
See our complete analysis of Baidu here
Here Are The Key Challenges Impacting Baidu
Low Monetization Rate On Mobile
Even though Baidu is witnessing rapid growth on the mobile platform, this presents a near-term challenge for the company, since the monetization rate is lower on mobile devices than on desktops. The monthly active users for Baidu’s mobile search rose rapidly from 540 million in Q4 2014 to 600 million in Q1 2015. This rapid shift towards mobile usage in China is also contributing to slowdown in year-over-year revenue growth rates. During Q1 2015, Baidu’s revenue per online marketing customer fell by 9.8% on flat growth in customer base (both in sequential terms).
We expect these challenges to persist in the near-term, though over the long-run, we believe mobile monetization rates could move closer to desktop levels as the mobile platform provides access to location-rich data and generally records higher engagement levels.
Slowing Revenue Growth
| Quarter | Q4 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | Q1 2015 |
| Annual Top-line Growth | 50.3% | 59.1% | 58.5% | 52.0% | 47.5% | 34.0% |
A key reason why Baidu’s stock fell after Q1 earnings was that the company under-performed on top-line growth. Though consensus estimate for revenue was pegged at RMB 12.908 billion for Q1 2015, the same came in at RMB 12.725 billion. [2] Moreover, the company’s guidance for revenue growth in Q2 in the range of 36.5% to 39.7% came in softer than expected. This slow-down in top-line growth, coupled with acceleration in expenses, has resulted in decreased margins for the company.
Even though Baidu’s growth could continue to slip in the short-term, we believe the company is poised for solid long-term growth considering the massive growth potential in the Chinese Internet market and Baidu’s strategies in the online to offline (O2O) and mobile marketing markets.
Threat To Market Share
Baidu’s market share on desktop search has decreased significantly over the recent past. It fell from 80.4% in August 2012 to 54.0% in August 2014 (according to DAO Insights, a Chinese social insights platform) [3] During the same period, the market share of Qihoo 360 and Sogou increased from 1.2% and 7.5%, respectively, to 29.2% and 14.7%, respectively. Nevertheless, Baidu has been able to retain its dominance over the mobile search market (commanding more than 80% market share). Yet Qihoo 360 is taking aggressive measures to increase its share in the mobile search market to 30% within the next two years. If it does so, it would cause a serious dent in Baidu’s market leadership. [4] Additionally, since Qihoo and Sogou are ramping up their search monetization, this could also impact Baidu’s ability to raise prices on ad units. Hence, the threat to Baidu’s market share is significant and could cause serious problems in the future.
Decreasing Time Spent On Search
Apart from the above concerns, there are also worries that users on mobile are spending less time on search, due to the presence of a large number of mobile apps. This is also because users can search for location-based data on mobile apps, instead of using a search engine. If this trend continues to worsen, it could potentially impact the top-line growth for Baidu.
We have a price estimate of $212 for Baidu, which is broady in line with the current market price.
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Notes:- China Search Engine Market Share in Q3 2014, China Internet Watch, November 17, 2014 [↩]
- Baidu (BIDU) Stock Falls in After-Hours Trading on Mixed First-Quarter Earnings Report, The Street, April 29, 2015 [↩]
- Chinese Search Engine Landscape – Baidu Losing to 360 and Sogou, DAO, January 28, 2015 [↩]
- Qihoo 360 Targets 10% Mobile Search Query Share by Year-end, Malbridge Consulting, October 14, 2014 [↩]