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Investment Overview for Baidu (NASDAQ:BIDU)
Below are key drivers of Baidu's value that present opportunities for upside or downside to the current Trefis price estimate for Baidu:
- Revenue Per User: We currently forecast the search services revenue generated per user by Baidu to increase from around $11.80 in 2016 to just over $20 per user by the end of the Trefis forecast period. However, if the growth in the Chinese economy - particularly the e-commerce market - outperforms expectations, Baidu could benefit from a larger base of advertisers willing to pay for for ad slots and prioritized search results. As a result, Baidu could generate more revenue per user than we currently forecast. In the event that this figure rises to $25 per user by the end of our forecast horizon, there could be an upside of 15% to the Trefis price estimate. However, if the growth rate slows down and the figure reaches only $18 per user by the end of the forecast period, there could be a downside of about 10% to the Trefis price estimate.
- Monthly Active Users: We currently forecast Baidu's monthly active users to increase from around 665 million in 2016 to around 830 million by the end of Trefis forecast period. Our assumption for the sustained growth in Baidu's user base is mainly due to the expectation that internet penetration in China will continue to rise as it has historically - from 19% in 2008 to over 50% in 2016. Comparatively, internet penetration in the U.S. is around 88%. If penetration levels in China fail to increase in the next decade, the rate of growth of Baidu's user base could slow down. If the number of monthly active Baidu users increases to only 700 million by the end of the forecast period, there could be a downside of about 10% to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Baidu at the top of the page.
Touted as the Google of China, Baidu is the number one Chinese language search provider and the most trafficked website in China. Baidu's main search operation provides search for websites, audio files, and images.
Baidu offers a unique Chinese language search platform to both users and customers. This platform consists of its own websites as well as the Baidu Union, a network of third-party websites and software applications. By generating traffic from its users, Baidu is able to attract business customers that wish to advertise their products and services alongside Baidu's search results and on Baidu's web properties.
Baidu makes the majority of its money from its search operations. Baidu's search advertising business is driven by two important factors that contribute to its significance:
Search market share dominance in China
Baidu dominates the search advertising market in China, with an estimated market share of over 80% (by revenue).
Though Qihoo 360 and Sogou have emerged as credible players in the desktop online search market, Baidu has gained dominance over the country's mobile search market. Baidu also competes with Bing and Google China in the domestic search market.
Demand from online advertisers for keyword advertising on Baidu sites could continue to cause upward pressure on Baidu's Revenue per Search.
Low Internet penetration compared to developed countries
The Internet penetration rate has steadily increased from 19% in 2008 to over 52% in 2016. China’s Internet penetration rate remains low compared to developed countries (for example, the U.S, U.K, France and Japan have penetration rates of over 85%).
Low penetration rates translate into better opportunities for growth as the user base still remains low compared to the total population of the state.
Share Exchange Agreement With Ctrip
In 2015, Baidu entered into a share exchange transaction with Ctrip whereby it swapped its majority stake in Qunar for a 25% voting interest in Ctrip.
This deal comes as a positive for Baidu, in our view, as the online travel space is highly competitive and accounted for losses for Baidu in the past.
Threat To Market Share
Baidu’s market share in desktop searches has decreased in recent years, as Qihoo 360 and Sogou have seen significant gains. 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. If it does so, it could make a serious dent in Baidu’s market leadership. Additionally, since Qihoo and Sogou are ramping up their search monetization, this could also impact Baidu’s ability to raise prices on ad units.
Growing Mobile Users
Driven by rising adoption of mobile Internet and smartphones, Baidu's mobile search users are growing explosively. This has also contributed to increased monetization on the mobile platform.
Mobile revenue now comprises over 50% of overall revenues, as mobile search now accounts for over two-thirds of overall search traffic on Baidu, and its mobile monetization rate has improved over the past few quarters
O2O E-Commerce Initiatives To Drive Baidu's Growth In The Long Run
Baidu aims to fuel the next chapter of its growth with O2O e-commerce initiatives. These include services to connect users to merchants such as online travel, ticket booking, entertainment, food delivery, as well as grocery and other services. The company’s management expects this to be a RMB 10 trillion market opportunity.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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