Baidu Will Beam Higher as Chinese Internet Penetration Rises

The number of Internet users in China is growing at a rapid pace and the current low penetration of around 30% indicates a massive opportunity for Internet search players like Baidu (NASDAQ:BIDU) and Google (NASDAQ:GOOG) China to expand their reach. In addition, the number of smartphone Internet users in China is also on the rise evident from the exponential sales of the iPhone. The iPhone users are considered heavy data users and Apple (NASDAQ:AAPL) has recorded $13 billion in revenues, or 13% of total sales, in China in fiscal 2011. (Read: China’s iPhone Demand is Single Biggest Driver to Apple’s Growth)

We expect the growing number of Internet users in China across platforms, desktops, tablets and smartphones, can create a strong upside for Baidu’s stock.

See our complete analysis for Baidu’s stock.

Lower Internet Penetration Offers More Scope for Growth

The internet penetration rate in China has increased from just over 12% in 2007 to around 31% in 2010. Compare this with a 78% penetration rate in North America currently. Even at a lower penetration rate, the number of Chinese Internet users stands at 485 million as of June 2011 compared to 245 million users in the U.S. This means there’s a significant room for growth in China despite the country’s aggressive Internet censorship policies that have been criticized widely in international media. Companies want to be part of this growth even at the cost of toeing the line of the government. We have seen this happen with Google in the past. Baidu, on the other hand, is a local search engine and has good relations with vendors and advertisers and is in a better position to leverage growth in Internet users.

Rising Mobile Internet Users in China

While China has a low smartphone penetration of 15%, the number of smartphone users is expanding rapidly. Chinese telecom providers like China Mobile and China Unicom are offering handsets at subsidized rates to boost sales and earn more revenues through data usage. With the launch of 3G mobile phone networks in China, we expect the number of mobile Internet users to see further growth in the coming years.

While we estimate the total number of Internet users in China will increase from 592.5 million in 2012 to 823.7 million by the end of our forecast period, Trefis members project an increase from 636.4 million to 953.2 million during the same period. The member estimates imply an upside of 14% to the Trefis price estimate for Baidu’s stock.

We currently have a Trefis price estimate of $134 for Baidu’s stock, about in line with the current market price.

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