3 Reasons Baidu Might Not Be the Best Chinese Play

I'm going to attempt something a little odd today, Fools. Even though Chinese search engine Baidu (NASDAQ: BIDU  ) makes up 8.6% of my real-life holdings, I'm going to be giving you three reasons to consider selling Baidu stock today.

Why am I doing this?

Recently, Nobel Prize winner Daniel Kahneman visited Fool headquarters in Virginia. While visiting, he talked about how a number of different biases can lead us to believe we can predict the future with relative certainty. In reality, he argued, we're just deluding ourselves.

It got me to thinking about how I don't write enough about the risks of owning the stocks I own. So although I don't plan on selling my Baidu stock anytime soon, I think it's healthy for me to practice and model this behavior.

1. "China" does not equal "America"
Many people, myself included, have often used Google (NASDAQ: GOOGL  ) as a proxy for how Baidu would perform as it matures. Though Google is certainly a force outside the United States, it still got close to half of its revenue stateside last year.

That's important, because it forces me to examine just how different China and the United States are. For starters, there is a vastly different regulatory system in place. While Google might sometimes find itself in the crosshairs of public scrutiny for privacy reasons, Baidu is a whole different story. If the Chinese government wants information from the company, it'll comply without thinking twice. That's why Google decided to exit the country years ago.

Just as important is the evolution of mobile advertising. While Google has been able to develop a platform that delivers more ads at a lower price, Baidu is still working on its strategy. There's no way to tell if Chinese smartphone users will operate the same way Americans do, and it's yet to be seen if Baidu's massive investment in developing an effective mobile strategy will ever pay off.

2. Slowing Chinese economy
It's no secret that demand from China has played a big role in helping the global economy pick itself up off the mat. Sooner or later, though, that growth has to slow.

Signs are suggesting that slower growth in China will arrive sooner than some are ready for. Manufacturing is actually contracting, and as the standard of living goes up for workers, companies are finding less incentive to set up shop in the Mainland. This means leaving for greener pastures in countries where wages are lower.

Add all of this up, and it could mean that fewer businesses will be paying Baidu to advertise on its platform, which could significantly bite into revenue growth.

3. Competition
Finally, we get to a company that's been a real thorn in Baidu's side for the past year: Qihoo 360 (NYSE: QIHU  ) . Though Qihoo started out focusing primarily on Internet security products, it made a splash into the search game and has been rapidly accumulating market share ever since.

At the same time, it appears that Qihoo is offering companies better bang for their buck, as ads hosted on the Qihoo platform are much cheaper than they are on Baidu's. Though Baidu still holds a commanding lead in search market share, should that start to decline, Baidu could get into an advertising price war with Qihoo, which would have significant implications for Baidu's bottom line.

How to approach China
While I openly admit all of these risks are valid and worthy of your consideration, I think Baidu is doing the smart thing by spending money today to build a moat that will last into tomorrow. The fact that shares are trading for just 19 times earnings tells me that a lot of pessimism is already baked into Baidu's stock as well.

But if you're looking for a safer, less appreciated way to approach China, consider it's booming auto industry. China is already the world's largest auto market -- and it's set to grow even bigger in the coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.


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