Why a Beaten-Down Baidu Could Be a Good Investment
Shares of Baidu (BIDU) have fallen considerably in 2015 on account of various headwinds, especially the fears about a slowing Chinese economy. However, investors shouldn't be having any complaints about Baidu's financial performance since the company has improved its top line at an impressive pace of late. For example, its revenue last quarter increased 34% from a year ago to $2.05 billion.
This was driven by a strong performance in the online marketing segment. However, Baidu's revenue lagged analysts' consensus of $2.08 billion.
Aggressive investments will bear fruit in the long run
At Baidu, search is still about the direct immediate expression of its user intent, but the company is trying to redefine it. Baidu intends to go beyond just returning information like websites, addresses, and phone numbers to its users. In fact, Baidu is pioneering a different approach to the basic way of search and is creating a more natural, intuitive, and convenient way for people to perform search.
This is why the company will invest more than $3 billion in Nuomi, which it had purchased last year from Renren. Nuomi initially started as a group buying site, but it has grown tremendously with more than 650,000 stores across 330 cities in China, and the company is aiming to make it operational in the entire country before the end of 2015. Additionally, Baidu anticipates that it will become the second-highest grossing group sales app by the year end.
With these objectives in mind, Baidu is launching a new membership service that will enable businesses to maintain better relationship with their customers through Nuomi. This includes the integration of Nuomi's membership system with merchants' point of sale systems, allowing users to pay for goods using a virtual card inside the app. In addition, Baidu will also enable firms to provide offers and deals to users who subscribe to their store. Thus, this new system facilitates a more direct relationship with customers than those offered by group buying or location services such as Yelp.
Offline to online is yet another catalyst
In a yet another move to strengthen its long-term performance, Baidu continues to develop its online to offline (O2O) platform. There is tremendous opportunity in this segment since a majority of its transactions takes place locally and offline at present. For example, in the restaurant industry, which is a multi-trillion RMB industry in China, only 1% of reservations are made online.
Also, online take-out food delivery represents only a low single-digit percentage of overall restaurant gross merchandise value. To tap this opportunity, Baidu is trying to connect people with these services to provide users with convenience and choice, and enabling merchants to fulfill real-time demand to drive incremental revenue and improve capacity utilization.
These initiatives are likely to strengthen Baidu's business going forward. However, analysts are not very optimistic about Baidu. As per Barron's,
"CICC‘s Haofei Chen and Yue Wu also downgraded Baidu to Hold, saying that Baidu can no longer benefit from fierce competition among online verticals. For instance, last month, China's Craigslist 58.com (WUBA) merged with competitor Ganji. The new merged company "clearly stated that they will cut their sales & marketing expenses", a large part being online advertising dollars to Baidu. CICC's analysts also mentioned that Baidu's "O2O transformation is not running smoothly."
However, given the size of Baidu and its deep pockets, I think that the company is strongly-positioned to overcome competition going forward.
It is anticipated that Baidu's earnings will grow at a CAGR of 19% for the next five years, while the industry grows at 12.4% per annum. Given the aggressive moves that Baidu is making to improve its financial performance, this does not look surprising. Thus, I think that Baidu's weak stock price in 2015 has given investors a good opportunity to capitalize on its long-term growth.
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