Baidu Nips a Problem in the Bud

Baidu (Nasdaq: BIDU  ) is turning a scandal into an opportunity to prove that it takes its online credibility seriously.

China's leading search engine is firing four employees -- and three of them have been arrested by local police -- for allegedly taking bribes to delete message board posts.

The scandal broke over the weekend on reports that some users of Baidu Postbar were paying to have forum posts deleted. This isn't the first time that this has happened, but it's the first time that police and actual arrests are involved.

The easy response would be to simply nix the forum. Everyone knows that monetizing a discussion board is a tedious uphill battle. Regulars don't click on ads -- something that Facebook (Nasdaq: FB  ) investors are now learning all too well -- and advertisers aren't willing to pay much to reach an audience that isn't really looking to be converted into a customer. That's what search engines are for, and Baidu thankfully commands nearly 80% of that market in China.

However, Baidu's growing number of online destinations serve a broader purpose than simply turning a profit. Baidu wants to make sure that it's always close whenever someone is seeking out something online, and providing engaging websites outside of its namesake search hub is a great way to make that happen.

The market doesn't seem to care about the development. Baidu's stock opened higher and was trading nearly 5% higher halfway through the trading day. It only helps that Chinese portal Sohu.com (Nasdaq: SOHU  ) and online gaming specialist Changyou.com (Nasdaq: CYOU  ) are both soaring after posting better-than-expected results this morning.

A key plus for Baidu -- unlike Sohu.com and Baidu mobile search partner SINA (Nasdaq: SINA  ) -- is that it's actually growing on the bottom line. As Sohu.com, SINA, and other dot-com titans in China sacrifice margins in the near term for the sake of trendy traffic growth, Baidu is doing just fine.

Baidu's latest quarterly report saw revenue and earnings soaring 60% and 70%, respectively. Sure, there was a beneficial effective tax rate propping up Baidu's profitability, but it's still the undisputed dot-com darling in China. Letting its Postbar users and employees know that it won't tolerate illegal behavior -- even to the point of proactively alerting the authorities -- will help keep Baidu at the top.

Bullish on Baidu
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Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Baidu.com and Facebook. Motley Fool newsletter services have recommended buying shares of Baidu.com, Facebook, Sohu.com, and SINA. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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