Baidu (BIDU) Burns the Bears

Shares of Internet search giant Baidu (BIDU) recently surged, despite posting a rare drop in profit during its second quarter. Baidu, often referred to as the "Google (GOOG) of China," reported that its earnings per share fell 4.5% to 2.46 billion RMB ($430.27 million), or 7.52 RMB per share, although revenue rose 39% to 7.56 billion RMB ($1.23 billion).

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Baidu's bottom line decline was caused by a 73% increase in R&D costs and 84% jump in selling, general and administrative costs, related to increased investments in boosting its infrastructure, especially to tap into the mobile market. For example, Baidu recently purchased 91 Wireless Websoft, one of the country's largest online mobile app stores, from NetDragon Websoft for $1.9 billion - the company's largest investment to date. The purchase of 91 Wireless is expected to allow Baidu to contend against Tencent Holdings and Qihoo 360 (QIHU), which have both significantly boosted their mobile presence through popular apps, such as WeChat and anti-virus software, respectively. Internet giant Alibaba invested $800 million to invest in Sina's (SINA) Weibo microblogging business and online mapping company AutoNavi Holdings (AMAP). The mobile market is one of the fastest growing ones in China, with over 300 million mobile users online - up from 200 million last September. Despite these hefty investments, Baidu forecast a strong third quarter, with revenue expected to come in between $1.42 and $1.46 billion, ahead of the Thomson Reuters' consensus estimate of $1.34 billion. This is a notable turnaround in top line growth for the company, which silenced bearish concerns that Baidu's revenue growth would eventually cool off after years of feverish double-digit growth. Baidu expects the combination of a popular app store and mobile search revenue to continue boosting its top line growth. CFO Jennifer Li stated that Baidu will continue investing heavily and growing through mergers and acquisitions. In other words, earnings might fall while revenue growth will remain a top priority. Roughly 10% of Baidu's quarterly revenue was generated by smartphone users, which also allayed concerns that it was falling behind in the mobile race against its smaller rivals. CEO Robin Li stated that the widespread advantage of smartphones was an advantage for Baidu, since it is easier to place advertisements on mobile versions of websites. Baidu also simplified the process of purchasing mobile ads. Li stated that Baidu would focus on increasing location-based services, which are being heavily implemented by its Western peers Google and Facebook (FB), to improve targeted advertising. App distribution, search, and online video also remain top priorities for the company. Baidu currently has an 80.6% share of the Internet search market in China, and it faces the main challenge that Google now faces in its key markets - how can it keep growing? Although the widespread adoption of new mobile technologies and some well-equipped challengers remain hurdles for the company going forward, the company is still an undervalued strong growth trading at 19.9 times forward earnings with a 5-year PEG ratio of 1.28. Other News About BIDU Baidu Earnings Confirm Bullish Outlook Is the worst over for Baidu? Baidu Profit Beats Estimates as Smartphones Lure Ad Buyers Baidu's mobile growth is higher than expected. Other Stocks in the News Big Pharma's Bribery Blues GSK faces a nasty scandal in China. WhyAren't Investors Worried About This Medical Devices Maker? Can Stryker keep rising despite recent recalls? Copyright 2013 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.

Published on Jul 30, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2016. Content published with author's permission.

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