Is Baidu Really Worth More Than $100?

Chinese search giant Baidu (BIDU 1.02%) has been fighting a rearguard action lately as competition, particularly from Qihoo.com (QIHU.DL), has taken aim at its preeminent position. Its shares are down 30% from their 52-week high and had been as much as 44% off the peak price, but Baidu is on the offensive again and analysts believe it can regain momentum.

Yet most of its revenue still comes from ads, and with the trend toward mobile computing gaining traction even in China, there's a real worry that its base of support will further wither away. So let's take a closer look at whether Baidu will be able to maintain this lofty price level for an extended period of time.

Baidu snapshot

Source: FinViz.com. N/A = not available; Baidu doesn't pay a dividend.

High steppin' honeys
When Qihoo launched its own search engine, it was a shot across Baidu's bow, but most analysts -- and probably more than a few investors -- didn't think much of its chances to assail the industry leader's ramparts. Yet after surging to a 10% share of the market and seeing Baidu fall to 71%, the antivirus software company is seen as a force to be reckoned with. Sohu is falling further behind in third place, with less than an 8% share.

Yet I don't see Baidu's tit-for-tat maneuver in launching its own antivirus product as being similarly successful -- or meaningful, rather. Despite name recognition that ought to help it move the sales needle a little, it seems like a move that diminishes the search leader's position at the same time as it increases Qihoo's stature. Still, with the growing importance of mobile, Baidu is going to need additional sources of revenue, which explains its new mobile browser, its entrance into the handset market, and the partnership with Apple to have its search engine standard on iPhones and iPads sold in China.

Battle of Five Armies
Qihoo continues moving further in on Baidu's search turf, with rampant rumors that it is teaming up with Google (GOOGL 1.27%). In the past, management said it is willing to work with third-party providers like Microsoft, and it has launched a test marketing of Google's AdSense on its search results page. What once seemed like Baidu's indomitable fortress now looks as porous as Swiss cheese.

But don't count Baidu out just yet. According to the government-run China Internet Network Information Center, over the first six months of 2012, the country hit 538 million users, an 11% increase over the year-ago period, and it was expected they'd cross the 620 million user threshold by the end of the year and 800 million by 2015. Yet the penetration rate was estimated to be at less than 40% of the population, meaning there was still substantial room for meaningful growth, as it would only reach 57% of the population within three years' time.

More than one lever to pull
There are also over 1.1 billion mobile phone users in China, suggesting 82% of the population has a handset device. Lenovo is the biggest phone maker in the country, followed by Samsung and Apple. While maybe necessary, it's doesn't seem likely a Baidu phone is going to be stealing much share from the leaders.

There are international opportunities ahead as it looks to diversify geographically. It's moving into Brazil and is partnering with France Telecom for an entrance into Africa and the Middle East.

And that's part of the problem with the search giant's valuation. It continuously has to snipe at its rivals in a bid to merely run in place, all the while they're taking large strides -- and large swaths of market share -- from its bread-and-butter business.

Search markets can grow and mobile does offer opportunities, but mobile has yet to offset the declines experienced in Baidu's core search business -- and the competition isn't standing still, either. At 18 times earnings estimates, it looks decently valued compared to Sohu, Renren, or even Qihoo, but I'm wondering whether analyst growth expectations are a bit too bullish even with the demographic trends suggesting otherwise.

Let me know in the comments box below whether you agree Baidu needs to fly closer to the ground before it can expect to soar higher again, or if its scattershot approach to competition will lead skeptics searching for an excuse why it regained its altitude.