Here’s Why Baidu Is Setting Up A $3 billion Internet Investment Fund

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Recently, Baidu (NASDAQ:BIDU) announced that it had established a $3 billion internet investment fund called Baidu Capital, which will focus on mid- and late stage deals in the internet sector in China. As competition in the Chinese internet market intensifies, Baidu needs to invest in new technologies to stay relevant in an ever-evolving market. Artificial intelligence, along with virtual and augmented reality, are being touted as the next big things after the smartphone era and Baidu is proactively looking to establish itself as a leader in these segments. The company recently launched an artificial intelligence powered chatbot to connect with patients, field medical questions and suggest diagnoses to doctors. We believe investment in newer technologies is critical for Baidu’s growth over the long term. The new investment fund can ensure that the company continues to invest in innovation-based start-ups and improve its own offerings to stay competitive in China’s internet market.

Investing In Future Growth

Baidu generates most of its revenues through “Search Services” and according to our estimates, this segment accounts for nearly 75% of the company’s valuation. We expect a steady increase in Baidu’s monthly active search users from around 700 million in 2016 to more than 900 million by the end of our forecast period.

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However, the company is facing competition from players such as Tencent and Alibaba in the Chinese internet market, which are using innovative technologies to attract users. For instance, Alibaba recently launched an online store based on virtual reality and is developing a payments system where users can nod to pay in a virtual reality environment. While Baidu is working on its self-driving vehicles initiative and focusing on its cloud computing abilities, search engine services remain the key source of its revenues. This business suffered a setback with change in Chinese regulations around medical advertisements and Baidu’s reputation was adversely impacted due to misleading medical advertisements on its platform.  Experts believe that Baidu needs to find new growth points to cope with the slowing momentum of its traditional search business. In Q2 2016, Baidu’s revenues registered only a 10% year-on-year increase, primarily due to changes in Chinese regulations impacting medical advertising revenues on its platform. Operating profit declined by 30% year on year in this quarter. Using innovative technologies to ensure that users are hooked to its platform would be critical for Baidu’s growth in future.

As Baidu looks for new growth opportunities, we believe investing in start-ups focused on internet innovation can help Baidu maintain its position in the changing internet landscape and compete effectively with players such as Alibaba and Tencent. While Baidu is focused on innovation, especially in artificial intelligence, a dedicated fund to invest in start-ups can accelerate the pace of innovation and prepare Baidu for the future.

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