Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is Baidu Jumping on the Investment Treadmill?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

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.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2859405, ~/Articles/ArticleHandler.aspx, 8/28/2015 1:10:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

David Eller

I started contributing to the Motley Fool in 2013. I have held research positions at two investment banks and two hedge funds before trying more entrepreneurial ventures. I'm passionate about helping people find freedom in financial independence. Feel free to add comments and start a discussion. I hope to use these articles as forums to learn from you as well as share my opinion.

Today's Market

updated Moments ago Sponsored by:
DOW 16,620.93 -33.84 -0.20%
S&P 500 1,984.83 -2.83 -0.14%
NASD 4,821.31 8.60 0.18%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 12:54 PM
BIDU $151.93 Down -0.13 -0.09%
Baidu CAPS Rating: ****
GOOGL $657.23 Down -10.73 -1.61%
Google (A shares) CAPS Rating: ****
QIHU $53.39 Up +2.10 +4.09%
Qihoo 360 Technolo… CAPS Rating: **