Google Play plans to enter China – will Baidu’s stock lose more value?
Baidu‘s (NASDAQ:BIDU) current market price is almost 40% lower than our price estimate of $216. While the stock continues to show a declining trend, we believe that the market has already factored all the potential threats to Baidu’s revenues due to increasing competition. A further significant decline in the stock price looks unlikely.
Our previous analysis listed out reasons why Baidu could lose its strong market share (read Market Share And Broader Chinese Economy Risks will Impact Baidu)
While this analysis did not factor in the impact of the expected launch of Google Play in the fall [1], we believe this decision could add to Baidu’s woes and may lead to additional potential downside of 10% to our price estimate. Our updated bear case of potential 45% downside still results in a price estimate which is within 5% range of the market price, suggesting that further stock price decline might be unlikely.
See our complete analysis of Baidu here
Baidu’s Dependence On Mobile Is Growing, Which Is Where Google Play Will Compete
Baidu’s mobile revenues as a percentage of its total revenues are increasing. In the last quarter of 2013, mobile revenues accounted for 20% of the company’s total revenues. This figure increased to 36.4% for the year 2014 and 50% in the second quarter of 2015. If this trend continues, more than half of Baidu’s revenues will come from mobile searches going forward. Below chart shows break-up of Baidu’s revenues into mobile and non-mobile sources.
The revenues for 2015 are estimates.
The chart shows how the non-mobile revenues show a declining growth trend and the increase in Baidu’s revenues is coming primarily from mobile searches. Google’s entry in this market could be a game changer. Google Play is a direct competitor to Baidu and may impact the latter’s mobile search revenue growth. Baidu app users currently use Internet searches to download applications. The integration of Baidu’s app with its search engine implies that its app users are also its Internet search users. If the app users move to Google, Baidu’s internet search revenues will be directly impacted.
It is a bit early to say whether Google will succeed in its China strategy. The current Android app providers have been adopted by the market, so Google may find it difficult to break in.
If Google succeeds in China, Baidu’s market share could take a significant hit and it could end up with less than 50% market share in the years to come. This scenario presents an additional downside of 10% to our earlier published bear case Market Share And Broader Chinese Economy Risks will Impact Baidu
However, since the current market price is already 40% below our estimate, the updated bear case scenario still puts the price within a narrow range of the market. Baidu’s earnings in the next few quarters would provide an indication of its response to increasing competition and how much market share it is able to retain.
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