Baidu Inc (NASDAQ:BIDU) is well-known as the Google Inc (NASDAQ:GOOG) of China given its 73% share of combined mobile and PC search traffic (according to research firm Analysys International). So why are its stock prices declining?
While Baidu most certainly gained from Google’s exit from China, several home-grown players are now proliferating, the most significant of which is currently Qihoo 360 (NYSE:QIHU). Qihoo entered the search market by leveraging its security user base of more than 450 million.
The company was already offering its Internet security products for free and generating revenue through advertisements. Its search engine So.com followed the same model and so was immediately successful, pushing it to the number two spot. Qihoo is particularly strong on the mobile platform, where it has a number of popular products.
The merger between Sohu’s (NASDAQ:SOHU) Sogu and Tencent’s Soso search engines also makes for a stronger third player in the search market.
Baidu is the market leader by far and the company is now focusing on the mobile segment, because this area is likely to see much stronger growth. The company has built products targeting three specific areas in mobile search, app distribution and location-based services. Management stated that at the end of the last-reported quarter, it had leadership positions in all three.
On the flip side, the company saw SG&A expenses increase 107% in 2013, driven primarily by the promotion of its mobile products. And investment for growth does not end here -- it is expected to remain particularly strong through 2014. Although sales will increase this year, management intends to plough back all additional profits into promotion in order to capture further market share in mobile.
Another hit to profits is the increased headcount, which was up by 5,300 in the last quarter. Acquisitions accounted for 4,000 of these people with most of the rest being recruitments for Baidu’s own R&D operations.
The Zacks Consensus Estimate for the current quarter dropped 15 cents following the earnings announcement with the estimate for the following quarter dropping 40 cents. The estimates for 2014 and 2015 are down $1.17 and 91 cents, respectively. This drove the Zacks Rank to #5 (Strong Sell). However, note that even after the revision, earnings for 2015 are expected to be up 50% from 2014 on an expected revenue growth rate of 39%, which is no mean feat.
Therefore, it is apparent that the market is pricing in the increased competition and Baidu’s proposed investments. We would watch the price for an inflection point, buying on the weakness.