Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of Chinese search engine Baidu (Nasdaq: BIDU) fell as much as 10% in intraday trading, before recovering to a 6% loss for the day. Several factors contributed to the drop, including an analyst downgrade, and potential legal action against online rival Qihoo 360 (Nasdaq: QIHU).
So what: Baidu has been China’s dominant search engine, but today’s downgrade came on the heels of revelations that the company might take legal recourse against Qihoo for its newly-designed search engine. The smaller Qihoo is known primarily for its Internet security products, but had an agreement with Google (Nasdaq: GOOG) to use a modified version of its search engine. Today’s legal rumblings led Deutsche Bank to downgrade Baidu to Hold, although Citigroup’s analysts maintained their long-term Buy rating on Baidu earlier in the day.
Now what: Competitive threats are always a danger for Internet companies, but both Baidu and Deutsche Bank may be overestimating Qihoo’s ability to develop a truly viable alternative. Google’s faced billion-dollar threats for years, and yet has kept a chokehold on global English-language searches. This situation is certainly worth keeping a close eye on, but investors shouldn’t expect Qihoo to suddenly trounce a very well-established Chinese search engine without substantial effort and significant market dissatisfaction with the incumbent.
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