There has been growing concern among shareholders in Baidu (NASDAQ: BIDU) that the Chinese search engine may have hit a wall, or more precisely that the bubble has burst and economic growth that was experienced in 2010 will be a distant memory as 2011 rolls through. While sustaining an earnings growth of 135% (as analysts have predicted for 2010) appears unlikely that’s not to say Baidu will fall flat on its face in 2011 as many expect earnings to grow 62% in the new year; and there are a number of potential acquisitions the company may consider as a way to capitalize on the growing Chinese market, something they eluded to at the recent Reuters China Investment Summit.
Much has been made about the Google (NASDAQ: GOOG) controversy in China and the recent WikiLeaks cable that revealed a “contact claimed a top PRC leader was actively working with Google competitor Baidu against Google.” Those efforts led to Google’s partial retreat from the country and helped Baidu establish a better than 70% share of China’s Internet search market.
While the critics have claimed this showed Baidu held no real competitive edge over Google the fact that the government was willing to sabotage Google is telling sounds like an advantage. The argument that young Chinese Internet users will turn from Baidu because they are viewed as an arm of the government seems too idealistic and as long as China continues to censor Google results the American company will continue to look in from the outside.
This should give Baidu time to close the technology gap that does exist between themselves and Google while grabbing a larger market share, capitalizing on an improving economy, and generating more revenue through their new monetization platform (something that looks very similar to the Google model).
Generating new revenue and producing additional earnings has been something that Baidu has mastered as, when this year ends, have completed six straight full-year profit gains. With what lays ahead in 2011 the prospect of a seventh year looks promising.
As a search engine Baidu generates money off of advertising and there are a number of indicators that have shown 2011 will offer plenty of opportunities for increasing their business. Rumors of a potential move on SINA (NASDAQ: SINA) would give the search engine the popular microblogging site Weibo and there could be an effort to pick up Youku.com (NASDAQ: YOKU), China’s video-sharing equivalent of YouTube. Both of these would be major coups for Baidu as it would open the door for new advertising possibilities.
That’s significant as China’s online ad market is expanding at a tremendous rate with analysts predicting 2010 to generate a 37% rise to $3.7 billion and according to eMarketer, a leading digital marketing and media analyst, the double-digit growth rates should continue through 2014 by which time spending could hit $9.5 billion. Holding the majority of the search market Baidu would be the obvious winner.
Those lofty figures for online advertising are being based on, among other things, the flurry of Chinese IPOs, all looking to gain market share in their industry and this would obviously lead to online advertising.
Investors shouldn’t discount the fact that online retail in China is on the brink of a major breakthrough as more shoppers are turning to the Internet, again attracting advertisers. In some estimates a third of the country’s Internet users, approximately 140 million, shop online and that is destined to skyrocket when the issues like transaction-security get worked out.
Baidu has been preparing for this online retail advancement and already has a joint venture in place with Japan’s Rakuten which has designed an online marketplace which allows companies to set up their own digital stores, a popular method of selling products in Asia. The joint venture has established RakuBai as an e-retail site and they expect to have 100 million consumers on the website over the next three years.
That’s not all Baidu has to look forward to as the company has already launched a group-buying initiative similar to Groupon which would increase its base of paid search advertisers. Looking at where Groupon is right now, if Baidu’s Youa e-tail platform works then the revenue could be massive.
With all of these monetization opportunities out there Baidu hasn’t forgotten that the key to all of this is keeping their share of the search market. Chairman and CEO of Baidu, Robin Li, stressed that the company would continue to develop new technologies that benefit the user and in the third quarter results he pointed out “during the quarter we announced several exciting developments including the Baidu Open Application Platform, the first platform integrating web search with an applications library. Such pioneering initiatives that focus on Internet user needs are at the center of our R&D investment.”
Whatever your feelings are about the relationship between the Chinese government and Baidu there is enormous potential that still exists for the company. If Baidu continues to develop their search and satisfies the demands of their users they should have no problem attracting the advertisers and with the expanding online market in China that should keep shares climbing.
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