Baidu: Investments and User Growth Are Long-Term Catalysts

Chinese stocks have taken a massive hit of late and Baidu (BIDU) is no different. The Chinese search engine giant has lost 37% of its value in 2015, with the majority of the drop coming in the past month as Chinese stocks have taken a beating of late due to slowing economic activity.

However, I think that the drop in Baidu's shares has opened up an opportunity for investors as the technology giant is taking smart steps in order to improve its business from a long-term perspective.

Short-term pain will lead to long-term gain

The Internet search provider has made strong progress from a desktop-driven search engine to a mobile-driven business, helping it increase its penetration into the e-commerce and video platform.

For example, its monthly active users in the second quarter came in at 630 million, representing an increase of 24% year-over-year.

In fact, Baidu hit over 300 million active monthly users for its mobile maps. The company has now reached 70% of the market in terms of daily active users on Android for its mobile maps. More importantly, this strong momentum of active users has helped the company enhance its gross merchandise value to RMB 40.5 billion, an increase of 110% year-over-year. Also, it expanded its offline-to-online margins by more than 50% last quarter.

Looking ahead, Baidu remains on track to capitalize on its e-commerce platform. It is entering internet service businesses such as food services, movie ticketing, and other offline services such as consumer home delivery. Moreover, Baidu plans to increase its investment in digital wallet and video streaming. The expansion into internet services will enable the company to compete with likes of Alibaba and Tencent.

However, investors have to keep in mind that Baidu expects its selling, general and administrative expenses to rise 80% to 90% in the second half of the year. Also, it expects its R&D expenses to increase approximately 56% over last year. An increase in these expenses will definitely hurt Baidu's margins this year and impact its bottom line performance. However, from a long-term perspective, I think that Baidu is doing the right thing by investing in this platform as it will continue expanding its reach in the end market, which will ultimately have a positive impact on its financial performance.

Mobile maps and app distribution are gaining traction

Baidu recently reached a milestone of 100 million daily active users for its mobile search app. In fact, flagship gateway apps such as Mobile Baidu Search Apps and Baidu Mobile Maps have been named amongst the top 10 most used apps in China at the end of June 2015 as per Analysys International.

To sustain this momentum going forward, Baidu recently made improvements to these flagship gateway apps. It optimized its mobile infrastructure, app formats, and improved user targeting. Also, Baidu enriched its services by launching Phoenix Nest images. This is a deep learning-driven system that will help recognizing appropriate and attractive images from an online marketing customer's website. Also, it will automatically and intelligently crop and resize images, and finally embed them in the paid search app.

In fact, since its launch at the beginning of the second quarter, the apps featuring Phoenix Nest images have delivered an increase in both CPM and click-through rates. These mobile and PC monetization moves, coupled with its O2O initiatives, will enable the company to tap the total addressable market of RMB 10 trillion of local e-commerce market opportunity.

Conclusion

All in all, Baidu's investment in O2O initiatives will drive its growth in the long run. More importantly, the company has enough cash on its balance sheet to continue making investments to expand its business. For instance, its balance sheet carries total cash of $9.34 billion, which is comfortable ahead of its total debt of $4.16 billion. Hence, I think that investors should consider using the drop in Baidu's shares as a buying opportunity since the company is adopting smart moves to enhance its business in the long run.

Published on Aug 25, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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