As Chinese Online Ad Spending Rises so Does Baidu’s Stock

September 8th, 2011 by Trefis Team
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Baidu’s (NASDAQ:BIDU) stock is highly sensitive to its revenue per search (RPS) since search advertising contributes nearly 90% to Baidu’s stock price by our analysis. Baidu’s revenue per search has been rising consistently over the years due to continuous growth of China’s online advertising market and Baidu’s growing dominance in the search advertising market in China over competitors like Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO). However, last month Baidu again showed up on the radar of state-run China Central Television (CCTV) for fraudulent advertising practices by selling its top search results to companies selling unlicensed products for a high bid price. (See Baidu Extends Market Share Gains in China as Google’s Dwindles) Advertising practices of Baidu as well as the practices of those advertising on Baidu have been a recurring problem, which has negative media attention on the Internet giant in the past.

While we estimate Baidu’s revenue per search (per 1,000 searches) will increase from $5.40 in 2012 to $7.90 by the end of our forecast period, Trefis members expect an increase from $5.80 to $9 during the same period. The member estimates imply an upside of 12% to the Trefis price estimate for Baidu’s stock.

We currently have a Trefis price estimate of $134 for Baidu’s stock, which is just below the current market price.

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Online Shift in China’s Advertising Market to Boost Baidu’s RPS Levels

According to research by MagnaGlobal, China’s advertising market is expected to grow by 20% in 2011 to $28 billion and to double by 2016, [1] while the online ad market is expected to grow by 30% in 2011 to $3.75 billion. [2] Hence faster online ad growth means that the advertising money will continue to shift online, which could push Baidu’s revenue per search higher.

According to another report by  advertising and media buying company, ZenithOptimedia, developing markets will comprise nearly 36% of advertising spending in 2013 up from 31.5% in 2011 and China will surpass Germany as the third largest ad market in the world after Japan and the U.S. this year [3]

Baidu’s Continuing Dominance in China’s Online Search Advertising Space

Baidu remains the preferred choice for advertisers and continues its dominance in the Chinese search engine market. More demand for bid of keywords on Baidu sites will continue to boost Baidu’s RPS levels. Baidu dominates the search advertising market in China with a market share of close to 80% while Google has less than 20% market share and Yahoo has an insignificant amount. Google’s exit from China last year, where it decided to shut its Chinese domain google.cn and reroute searches to its Hong Kong site has also benefited Baidu.

Our complete analysis for Baidu’s stock is here.

Notes:
  1. China ad revenue to grow 20.4% in 2011, China Screen News, 20 June 2011 [↩]
  2. Online Video, TV, Radio To Boost China Ad Market In 2011, Investors.com, November 2010 [↩]
  3. ZenithOptimedia: China to become No. 3 advertising market this year, April 2011 [↩]