Baidu Inc. Proves Once Again Why It's One of the Best Buys in Tech

Investors lost confidence in Chinese search giant Baidu (NASDAQ: BIDU  ) in 2011 and early last year, creating what I viewed as one of the most obvious home-run investment opportunities I'd seen in some time -- perhaps in all my time as an active investor. And true to form, Baidu has since rebounded nicely, with its shares up more than 100% since its early 2013 lows.

Baidu was up once again today after it released yet another impressive earnings report for the fourth quarter  and its full year 2013. So without further ado, let's examine Baidu's most recent earnings blowout.

Baidu by the numbers
Baidu maintained strong revenue growth in the fourth quarter, expanding its top line 51% during the period, slightly ahead of the 50% sales growth analysts were expecting for the quarter and, perhaps more impressively, represents a strong sales acceleration from the third quarter's 42% revenue growth. However, as was more or less expected, its huge sales momentum failed to flow down to Baidu's bottom line. Instead of growing, Baidu's net income contracted 0.4% compared with the fourth quarter of 2012.

And as should come as no surprise, Baidu's numbers this quarter were emblematic of its full-year performance as well. For the entirety of fiscal 2013, Baidu's revenue increased 43% year over year, while its overall profits declined 0.6%.

Still believing in Baidu
Seeing its profits stagnate in the face of soaring revenue could understandably give investors some cause for concern. However, as is so often the case, this periodic snapshot only does partial justice to how truly impressive Baidu's opportunity set remains.

Sifting further through its earnings release, we can see Baidu is making progress on a number of other key fronts. In the fourth quarter, Baidu increased its base of active online marketing customers by 11% to 451,000. And perhaps more encouraging from a long-term monetization perspective, Baidu was also able to increase the average revenue generated by each one of its advertising customers by 35%.

And while encouraging, Baidu's overall advertising base remains only a drop in the bucket of what it could one day be reaching. Remember, search engines like Baidu, Google, and Yandex are all funded primarily through providing search advertising. Baidu is quite clear that it intends to target small and medium-sized businesses in China as its primary source of advertising clients. Now, China is no paragon of economic transparency, so it's hard to get a truly clear handle of just how many SMB businesses are currently operating in the Middle Kingdom. Some official sources cite as few as 4.3 million, while other respected Western publications claim as many as 41 million. But even erring toward the more conservative side of the potential market opportunity shows Baidu is capturing roughly only 10% of its possible user base.

Sure, Internet penetration remains lower than some developed nations in China, and online advertising is somewhat of a new phenomenon as well. This implies that it certainly could take time for Baidu to realize its full potential. However, as the company with a stranglehold on the Chinese search market, it's an outsized opportunity large enough to make any investor salivate.

So while Baidu's problems with growth profits as quickly as revenues might irk some investors, it's important to remember that this one aspect only represents a very small piece of the overall rationale for investing in this company. And the rest of that opportunity certainly seems attractive to me.

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