After Its Recent Sell-Off, Baidu Bites Back

After shedding $6.6 billion in market value during the first four days of last week, Baidu (Nasdaq: BIDU  ) bulls decided to fight back.

Shares of China's leading search engine have closed higher for three consecutive trading days. The $1.9 billion in market cap that the market has wrestled back is obviously no match for the downturn that took place last week on reports that Qihoo 360 (NYSE: QIHU  ) is gaining market share at Baidu's expense.

However, it could just be that the market's realizing that it has seen this before, closer to home.

A walk in Google's footsteps
Qihoo 360 has recently replaced Google (Nasdaq: GOOG  ) as a search partner with its own solution. This could be problematic for Baidu, because Qihoo 360 happens to be the company behind China's most popular Web browser.

However, if Google wasn't able to gain ground on Baidu as the default search engine on Qihoo 360's browser, why should the company fare any better on its own?

Yes, the initial reports show Qihoo 360 gaining ground. This isn't a surprise. There will always be the novelty element to draw early attention.

Google's been there. It saw the market fretting over the launch of Microsoft's (Nasdaq: MSFT  ) Bing when critics warmed up to Mr. Softy's ambitious reboot. Remember Cuil? It turned heads when it launched four summers ago because it was founded by former Google engineers. Google acquired the remains of Cuil -- mostly for its search-related patents -- earlier this year. If you stand still long enough, you can still feel the aftershock tremors of when naysayers thought Wolfram Alpha would be the end of Big G.

We've been there -- at Google's side.

There's no such thing as a disrupt-proof company
Baidu's bouncing back. Qihoo 360's retreating.

Don't laugh off the potential threat. Any company is vulnerable, and that even includes Baidu, with its roughly 80% share of the Chinese search market.

However, patience is a necessary virtue here. Where will Qihoo 360's search popularity be relative to Baidu in a quarter or two? It's only once the dust settles and the curious have made their choices that we can truly score this match.

Maybe Qihoo 360 is able to make inroads as another homegrown fave. Being local isn't enough. Sohu.com's (Nasdaq: SOHU  ) Sogou has been growing quickly in China, but it's still a tiny player. Then again, everyone's a tiny player in China in Baidu's long shadow.

The key to any magic trick is redirection
Baidu isn't dismissing the Qihoo 360 challenge. Reports out of China indicate that Baidu is directing queries originating from browsers -- including Qihoo 360 -- automatically to Baidu's landing page.

It's a gutsy move. It makes it more inconvenient to search and possibly drives users to going with Qihoo 360's own engine. However, it also drives traffic to Baidu. If Qihoo 360 wants to use its browser to get visitors to its search engine, why can't Baidu use its search engine to become a bigger player in browsers?

Until the dust settles, at least investors can be encouraged by the value in Baidu's stock. The shares are trading at just 19 times next year's projected profitability, even though Baidu continues to grow a lot faster than that.

Obviously, Baidu won't seem all that cheap if it begins to yield market share to Qihoo 360. Advertisers will have to consider smaller engines in their marketing strategies, and the price to generate a lead may go down on Baidu in a more competitive market. However, before we cross that shaky bridge, we have to see whether Qihoo 360 is a legitimate threat or if it's merely the next Cuil, Bing, or any four-letter word that eventually fails to live up to the hype.

China's Internet opportunities as a whole are tremendous -- no one argues that. However, Baidu's potential exceeds that of most operators in this exploding space, especially after its recent sell-off, which is why we at the Fool crafted a premium research report on Baidu, diving deep into China's dot-com darling. The premium research comes with a year's worth of updates. Check it out.

The Motley Fool owns shares of Baidu.com. Motley Fool newsletter services have recommended buying shares of Baidu.com, Sohu.com, Google, and Microsoft and creating a synthetic covered call position in Microsoft. We Fools don't 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.


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