Is Baidu Jumping on the Investment Treadmill?

Baidu guided analysts to expect increased investments in adjacent businesses but this doesn't make it a bad investment.

Feb 28, 2014 at 2:00PM

Baidu (NASDAQ:BIDU) recently reported a beat on both the top and bottom line, but there is controversy surrounding the quarter. You can profit when analysts and journalists express concern unnecessarily. Qihoo 360 (NYSE:QIHU) and Google (NASDAQ:GOOGL) are competing for market share but the rewards are greatest for the winner. Lets take a look at the company's initiatives and you can decide if the dominant search vendor in the world's largest consumer market is a good investment.

Revenue of $1.57 billion beat estimates of $1.53 billion and EPS of $1.39 beat consensus of $1.37. Revenue guidance of $1.53 billion to $1.58 billion was also ahead of the $1.4 billion estimate. So why are people expressing concern over the quarter? Baidu has jumped on the Internet investment treadmill and turned up the speed to a four-minute mile. In order to stiff arm the competition, it is developing a wide variety of applications that may or may not produce profits for some time.

Investing more in adjacent businesses
On the call, the company stated that there are four areas that are its strategic focus: 1) mobile and cloud, 2) location based services 3) consumer products (gaming, music, literature and social) and 4) expanding internationally. Ok, is that all? It sounds like Baidu plans to take the profits from its successful search business and build out businesses resembling, Waze, Pandora, and Google Books. Any one of these can be a very costly venture, but attempting all of these could cause a Zen Master to lose focus. This sparked fear at the Wall St Journal that profit growth would be elusive going forward and sentiment was echoed by Morgan Stanley, which downgraded the stock from Overweight to Equal Weight yesterday.

Like Google, Baidu's core business began as desktop search and evolved to mobile. The incorporation of the data that is derived from additional businesses is key to maintaining its leadership at a time when advertising is core to the business. Today mobile only accounts for 20% of the company's revenue but that is likely to grow in as smartphone penetration increases with China's 3G rollout and cheaper, more user-friendly tablets become more prevalent. Baidu has to invest in developing this business.

Expecting an hall pass?
The Street's concern is that Baidu, which is a very profitable company, will try to get an Amazon-style hall pass where it doesn't need to produce profit. This seems to be an extreme concern that doesn't really hold water because the company is already generating a healthy level of profits from its core. Today, Baidu has over 100 million active users which will help the company monetize additional services that it does offer.

Competition with Qihoo is the greatest threat...and shrinking
Qihoo is the only real threat today for the company and may not represent a material threat longer term. A year ago, Qihoo had been taking share from Baidu because in August of 2012, it added a free, default search engine to its browser. Similar to the way Microsoft directed traffic to Bing through Internet Explorer, Qihoo directed traffic to its own search engine. As people evaluated Qihoo's search engine, there was a question of whether Bidu would retain its market share. Now, more than a year later, according to Analysys, Baidu has maintained the bulk if the search market share in China with 78.6%.

First prize is a Cadillac 
The complexity of investing in any high-growth industry is what to pay for the market leaders. Alec Baldwin said in Glengary Glen Ross, a cutthroat movie about real estate investing:

As you all know first prize is a Cadillac El Dorado. Anyone wanna see second prize? Second prize is a set of steak knives. Third prize is you're fired.

The business of Internet search is much the same, the bulk of the profits go to the winner, the rewards for second place are considerably smaller and most people don't think about the third-place vendor. If you decide to invest in one of the fastest growing, yet stable search markets Baidu is your best bet.

Baidu has huge potential, but it isn't our top stock for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

David Eller has no position in any stocks mentioned. The Motley Fool recommends Baidu and Google. The Motley Fool owns shares of Baidu and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers