Fool on Call: Is Baidu a Google Slayer?

The things we remember. I remember where I was when Buster Douglas knocked out the seemingly invincible Iron Mike Tyson. And I remember when Charles Woodson took a punt return to the house against my beloved Buckeyes. I also recall the first time I heard the word "Google" (Nasdaq: GOOG  ) .

It was the summer of 2001 and I was doing some research for a public policy think tank in Washington, D.C., when one of my colleagues informed me that Google was an excellent search engine to locate the hard-to-find information I was looking for. A few years later that nifty little search engine went public, and the rest is history.

We may one day look back and recall the day we heard of another emerging search engine power, Baidu.com (Nasdaq: BIDU  ) . The company's growth has been like a runaway freight train, plowing past Wall Street estimates, the latest quarter included.

My colleague Rick Aristotle Munarriz gave us a snapshot view of Baidu's latest quarterly performance. This edition of "Fool on Call" will take it a step further and highlight key points made in the company's latest quarterly earnings conference call about the Google and SINA (Nasdaq: SINA  ) partnership, staffing changes, and its progress in Japan.

Google a threat?
If you thought the mere mention of Google would strike fear into the heart of Baidu's leadership, you may be surprised to hear there was nothing of the sort. The topic of Google and its partnership with SINA was raised throughout the call, but each time Baidu's management team rejected the threat like incoming NBA super center Greg Oden rejects would-be shooters.

The first question out of the gate during the Q&A session of the call was on the topic of Google and its new partnership with SINA, and what effect the two are having on Baidu's business. CEO Robin Li responds:

We roughly have two-thirds of the search traffic for Chinese search. The rest of the players combined have about a third of that. We do monitor closely on how those players play in this space, but we believe that we are in a very good position to grow our service, and continue to benefit from the growth of the Chinese search market.

Another analyst pressed the issue further and again, Li sends the potential Google-SINA threat to the cheap seats, replying, "I believe, statistically, those kind of deals are insignificant to our business."

He does not sound too worried, does he? For Baidu, it is just business as usual. When asked if it may consider a similar partnership to boost traffic levels, Li stated that Baidu would maintain its current course of pursuing growth organically, attracting new users through word of mouth.

Baidu's current market share and rapid growth gives it a clear competitive advantage, but this is no time to rest on recent successes. We saw in Google's most recent quarterly earnings conference call that it is coming after the Asian market in a big way. Google is employing localized web pages in Hong Kong, Taiwan, and Korea that better represent these cultures, and it is introducing new applications -- like cross-language informational retrieval and universal search -- that together will make Google a very attractive alternative.

Staffing and advertising
Baidu isn't responding with its own suite of applications, at least not yet. Rather, the company's strategy right now is to increase the number of sales representatives and expand its presence among online advertisers. Baidu has approximately 120,000 advertisers on board, but CFO Shawn Wang explained during the Q&A that this represents a very small percentage of the overall market. He pointed to one report that suggests there are some 20 million small- to medium-enterprises in China, and that Baidu is currently tapping into only 1% of this enormous market.

To attract these potential advertisers, the company is transitioning to a direct sales model. Li recognized its direct sales center in Beijing as a "success," and added that it is looking to replicate the same in Shenzhen. During the quarter the company added 400 new sales reps.

Japan
As noted in a prior "Fool on Call," Baidu is focusing a great deal of attention on Japan right now. There wasn't much of a progress report on this initiative, but from the sounds of it things are going as planned -- the Japanese search engine should officially launch later this year.

The previous "Fool on Call" included the initial budget in terms of capital expenditures of this project, which was then estimated at $15 million. In this call, Wang revealed that it spent over $1 million in the first quarter and over $2 million in the second quarter. We should expect these investment costs to accelerate through the remainder of the year.

The only other update on this front is that Baidu has since invited Nobuyuki Idei, the former CEO of Sony (NYSE: SNE  ) , to join its board. Idei's experience in Japan should prove invaluable for the young Baidu start-up.

Not a Google slayer, but a real threat
Baidu's current concentration in China and Japan makes it unlikely that the company will strike a mortal blow to search engines with a global reach like Google and Yahoo! (Nasdaq: YHOO  ) . That doesn't mean it is not a serious threat to these companies. The Asia-Pacific market, and China in particular, is an enormously important market, and Baidu has made itself into the search engine of choice in this country, with hopes to do the same in Japan.

Right now, its growth strategy will be organic in nature, spreading by word of mouth and by attracting more and more advertisers. Eventually, like Google, it will likely need to develop attractive applications to keep web surfers on its sites. But that's a little ways off. In the meantime, shareholders can just sit back and enjoy what appears to be an enormously fun ride.

Baidu is a Rule Breaker pick. Yahoo! is a Motley Fool Stock Advisor selection. Take a free 30-day trial of any of our newsletter services today.

Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.


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