Baidu Can Capitalize on China's E-Commerce Growth Without Selling a Thing to Consumers

Its stake in group-deal site Nuomi.com is only the tip of the iceberg for Baidu's e-commerce potential.

Mar 8, 2014 at 1:00PM

Shares of Baidu (NASDAQ:BIDU) climbed to a new all-time high on Thursday after CEO Robin Li noted that Chinese e-commerce is growing six times faster than e-commerce in the U.S. Li told reporters that annual growth of online commerce in China is at about 60%, compared to 10% in the U.S. Although Baidu, the Chinese equivalent of Google (NASDAQ:GOOGL), isn't primarily an online vendor like Alibaba -- 24%-owned by Yahoo! (NASDAQ:YHOO) -- it stands to capitalize on the rapid growth in e-commerce.

Baidu can capitalize on the influx of online advertising that e-commerce companies will likely spend as revenue and opportunity increase. Meanwhile, Baidu has joined in on the e-commerce market with its acquisition of Nuomi.com from Renren (NYSE:RENN).

Direct benefit
Baidu's newly acquired Nuomi.com can directly capitalize on the strong growth in online spending. The Groupon-like service had an estimated $120 million in sales in the second quarter last year. Comparatively, Alibaba, the nation's largest e-tailor, generated $1.78 billion in revenue in the third quarter.

Yahoo! shareholders have been rewarded over the last year or so, as Alibaba's revenue has climbed dramatically. In the third quarter, it climbed 51%, year over year, but that was a deceleration from the 61% growth the company achieved in the second quarter. As a result of the slowdown, Yahoo! shares were punished when it reported its fourth-quarter earnings.

Baidu's new revenue stream could see even better growth than Alibaba. Not only does Nuomi.com have a much smaller base to grow from, it's also a relatively new format for buying goods. The company was founded less than four years ago in 2010. Additionally, Baidu can leverage its much larger user base to attract new buyers to Nuomi.com.

Renren, for its part, is shedding the business as its social media platform loses ground to more popular platforms like Tencent's WeChat and Sina's Weibo. The company initially planned to keep 41% of Nuomi.com, allowing Baidu to increase traffic to the site by leveraging its search audience. In January, Renren sold its remaining stake to Baidu. It may use the cash to sell more advertising and games for its social network.

Indirect benefit
Baidu's biggest business is its search engine, which funnels traffic around the web. Like Google, Baidu generates the vast majority of its revenue through online advertising. In the fourth quarter, Baidu had 451,000 active online advertising customers spending about $3,450, on average. Baidu's revenue per online marketing customer increased 35%, year over year, in the fourth quarter.

Baidu can sit back and continue to see its revenue grow at that pace as more people start shopping online, but it could continue employing its strategy of copying Google to benefit even further.

Google quietly rolled out a new advertising product in late 2012 called Product Listing Ads, or PLAs. These ads are designed to help e-commerce sites sell products people are already searching for -- basically leveling the playing field a bit with Amazon.com.

Google has seen great success with PLAs, increasing the cost per click by 80%, year over year, in the fourth quarter, according to Adobe. Meanwhile, PLA spending is estimated to have quadrupled over the course of 2013. Baidu can grow its business even faster by implementing a similar service.

The product everyone is buying
Baidu has a huge chunk of the market for a product that's rapidly increasing in demand: online advertising. With e-commerce growing at a 60% clip, Baidu can do better than grow its average revenue per advertiser at 35%. Current estimates expect revenue growth of 46.9% for 2014, but if Baidu takes further advantage of the huge growth in online commerce, it could outperform that.

Baidu isn't the only stock with serious growth potential
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Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google, and Yahoo!. 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.

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